| Free Newsletters Law and economic growth
Legal academics study the law extensively, but the great bulk of this research dwells upon the analysis of particular laws or doctrines as judged by standards of justice, individual liberty, or simple positive formalism. While such research is unquestionably valuable, law professors have fallen far
Economists have increasingly studied the importance of law to economic growth and made key contributions to our understanding of the issue. Most of these economists, though, are not trained in law and do not test many of the hypotheses that are most important to pragmatic legal and policy determinations.4 Indeed, much of the economic research appears to reflect a fundamental misunderstanding about what is meant by basic terms such as "law" or "rights" or "property rights." The contribution of economists to this study is invaluable, but the field cannot be left to this discipline; law professors must themselves add their understanding to the conversation.5
This Article surveys the field of empirical research on law and economic growth and analyzes its findings. The Article begins with a review of the theoretical and historical evidence associating good legal institutions with economic growth rates. The new institutional economics has used history and theory to make the case that legal institutions are crucial to economic development. While some may argue that such institutions are unnecessary for growth or are ineffective in light of local cultures, these positions contain only a grain of truth. There is ample reason to believe that law and legal institutions are fundamental to a nation's economic development.
Considerable empirical research now informs the economic and other theories about the relationship of law and economic growth. There is substantial evidence that some major legal rules and institutions (such as democracy, property rights, and certain government regulations) have a distinctly positive effect on growth. The findings, though, are too generalized and for the most part do not focus on the features of democracy, property rights, and regulations that are malleable policy positions. Moreover, much of the research has been conducted by economists who may fail to capture relevant legal variables.
The current issue "before policy makers therefore is no longer `do institutions matter?' but `which institutions matter and how does one acquire them?"'6 These are precisely the questions for which input from legal academics is essential. They are trained in the pragmatic operation of laws and legal institutions, unlike many economists. Legal academics should build upon and enhance the existing economic research and help discern the laws and legal institutions that facilitate the economic well-being of nations.
I. The Theoretical Importance of Legal Institutions for Economic Growth
Much research effort has been devoted to ascertaining the determinants of economic growth. Economic well-being cannot be ascribed to such fortuities as the natural resource endowments of nations.8 Factors such as investment and labor productivity are clearly critical to economic growth, and the important research question is how these and other contributors to economic growth may be encouraged. It is now generally recognized that government institutions and the law are relevant to increasing economic growth. This section will review the current understanding of the theory of economic growth.
The review begins with the theoretical contribution of the new institutional economics, which formally recognized the significance of law for economic well-being. Under this economic theory, a good institutional structure is necessary to unleash effective capitalist growth. There are some who argue that voluntary arrangements can take the place of a legal structure or that different local cultures are more economically important than particular legal institutions. The remainder of the section examines those claims.
A. The New Institutional Economics
Under the standard neoclassical economic model, legal institutions should not matter. The model explains how, independent of law, levels of economic development should steadily converge among nations, ultimately equalizing wealth, at least roughly.9 Obviously, this has not occurred.10 Great and persistent disparities in wealth remain, and countries have often shown a divergence, rather than convergence, of economic welfare.11 The neoclassical theory's prediction of convergence did not take account of the different national legal and institutional frameworks under which development occurred.12 The new institutional economics developed to address this failed prediction of the neoclassical model by emphasizing the importance of government institutions and policies to economic growth. This theory explains divergence in growth with the existence of varying qualities of national institutions across the globe.13 One cannot expect wise or efficient government institutions to evolve naturally.14 When such institutions do not arise, national growth suffers. Capitalism "is not a naturally occurring system."15
The new institutional economics is closely associated with the research of Douglass North, who won a Nobel Prize for his efforts and insights in developing the theory.16 The fundamental theory of institutional economics is straightforward. It begins with the assumption that individuals will invest for economic growth when they can capture the returns from their investments.17 The ability to capture economic returns from one's work or investment is not naturally automatic. To achieve optimality requires the existence of "[p]erfectly specified and costlessly enforced property rights."18 While such an optimal condition is unachievable, societies may be able "to raise the private return close enough to the social return to provide sufficient incentives to achieve economic growth."19 Absent such property rights, though, incentives may be insufficient to promote growth. In the view of the new institutional economics, "institutional capital may be a more important determinant of economic development than financial capital, physical capital, human capital, or technological capital.
North explored the importance of institutions historically. Throughout human history "growth has been more exceptional than stagnation or decline,"21 which suggests that the circumstances enabling growth are not inevitable or natural but require thought and effort. Government must be relied on to create the conditions enabling growth.22 However, government does not automatically create these conditions. It may in fact produce perverse policies, and the state at times has been "the source of man-made economic decline."23 North's tour de force through history begins in hte ancient world but keys on the Industrial Revolution and its associated great expansion of economic development. This growth transpired, he finds, only the private rate of return on invention and innovation."24 England and the Netherlands surpassed France and Spain during the seventeenth century, in large part because of the effective recognition of property rights.25 The "establishment of secure and stable property rights" was a "key element in the rise of the West and the onset of modern economic growth."26 More recent history shows that strong economies have market-oriented economic systems and that such systems are found in nations "that have recognized the need for and secured widespread property rights protected by just laws."27 The economic diffculties of the privatizing, post-communist states of Eastern Europe are attributed in large part to their poor legal systems.28 The importance of legal institutions is now widely recognized.29 Another Nobel laureate, Mancure Olson, has identified "the conditions necessary for economic success" as including "secure and well-defined rights for all to private property and impartial enforcement of contracts."30 Yet identifying the theoretical and historic importance of legal institutions does not answer legal institutions are necessarily better. The same law and government that can provide the prerequisites for property rights enforcement may also take them away. Research must focus upon the nature of institutions and legal rules that promote growth.
Hernando de Soto has recently written on the importance of full property rights to economic growth in poorer nations.31 He argues that squatters with untitled real estate in these countries have assets worth at least $9.3 trillion.32 Yet they cannot access these resources for investment because they lack the full rights of ownership associated with the formal property system.33 The wealth of the Western nations is attributed to the existence of such rights. The "legal property system became the staircase that took these nations from the universe of assets in their natural state to the conceptual universe of capital where assets can be viewed in their full productive potential."34 Enhancing economic growth and expanding its benefits "is principally a legal challenge," in which "[a]ll other disciplines play only a supporting role."35
Simply emphasizing the significance of the existence of property rights is not sufficient. Some poor nations suffer not from the absence of formalized property rights but from legal barriers to the recognition of those rights.36 Property rights must be readily enforceable and credible to have the desired effect. The substantive nature of the property rights is also relevant. Moreover, many other legal rules and structures appear to have a material effect on economic welfare.
B. The Incompleteness of Substitutes for Law
While the potential value of legal institutions and property rights has been broadly recognized by institutional economists, the actual need for such institutions may be exaggerated. Individuals may voluntarily organize their transactions, without legal institutions, in a manner that generally enables their capture of the returns of investment. They may mutually agree upon informal property rights and contract when they have informal assurances of performance by other parties. Perhaps law is not truly a necessary condition for development. North himself emphasized the importance of extralegal norms in protecting property rights, though only as a complement to legal enforcement of those rights.37 Some go much further and claim that private substitutes can take the place of legal arrangements and create the climate that enables economic growth.38 They argue that "the informal mechanisms which businesses use can be just as effective in supporting economic development as some formal systems."39 In this view, the "case for state enforcement of contracts may be overplayed."40
While private arbitration may be a valuable alternative for state enforcement of private deals in some cases, it has not proved to be a full substitute. Russia created private arbitration commissions to take the place of judicial enforcement, but "traders were reluctant to use these [commissions] despite the very high rate of contract violations."41 Perhaps this is because even a victory in arbitration may not be collectible. Private enforcement seems inferior to state enforcement of contracts, because private enforcement is typically more costly, creates a competition of violence, is more difficult to monitor, and often inhibits changes in economic institutions that may increase efficiency.42
The classic study of extralegal private governance is Robert Ellickson's study of the Shasta County, California cattle industry.43 He found that ranchers in the area effectively created their own informal rules for common topics of dispute, such as cattle trespass, boundary fences, etc.44 He therefore critiqued the theory of "legal centralism," which maintains that governments must be "the chief sources of rules and enforcement efforts."45 Ellickson therefore suggested that formal law was not necessarily required for economic arrangements to be effective. There are other examples of functioning private contract enforcement today, such as that found in the diamond industry46 or cotton industry.47 These informal approaches may even be more efficient than formal legal structures of property and contract.48
One may even argue that extralegal governance is an economically superior approach that has been undermined by the creation of law. The introduction of legal constraints may be counterproductive, by "undermining incentives to develop private cooperative arrangements and by creating incentives for entrepreneurs to invest in rent-seeking."49 Larry Ribstein contends that trust is essential to efficient transactions and that the introduction of laws may be counterproductive.50 By providing for the enforcement of detailed contracts, the law, he maintains, may "crowd out" the trust that enhances efficient transactions51 or even breed distrust.52
Matt Ridley, an evolutionary psychologist, maintains that trade predated law and thrived under the privately created and enforced rules that voluntarily arose.53 He observes that "[m]arkets, exchanges and rules can develop before government or any other monopolist has defined their rules," because they "define their own rules."54 Historically, merchant guilds created rules for transactions, with multilateral enforcement.55 For Ridley, modern commercial law was "invented and enforced" by merchants and "[o]nly later did governments try to take it over, and with mostly disastrous results."56 In this story, law is the enemy of growth. The story is echoed today in the increasing calls to privatize the commercial law.57 It is too quickly assumed, though, that the extralegal private contract governance is necessarily efficient and effective.58 More significantly, the creation of formal legal rules may actually enhance the private rules and not displace their benefits.
Under our relatively advanced legal system, contracts in any society may be considered formal (public legal) or informal (private extralegal), Parties clearly are able to transact, even absent formal legal institutions, through informal contracts, sometimes called relational contracts, that depend upon mutual trust and fair dealing.59 Parties might even prefer relational contracts, which can employ a more subjective standard for judging performance.60 Creation of a legal institutional structure for formal contracting does not, however, necessarily preclude conducting relational transactions.61 It simply adds an additional level of contracting choice. There are "informal sectors within the geographic jurisdiction of a legal authority [that] often establish and enforce rules and resolve disputes."62 Indeed, Ellickson's classic discussion of private ordering among ranchers occurred in a state subject to formal legal rules.63 The government need not and generally has not prohibited private arrangements, such as arbitration agreements, and so formal law need not directly interfere with extralegal contracting. It may, however, considerably expand the scope of contracting. Parties may use clauses such as choice of law, choice of forum and arbitration provisions "to allocate certain aspects of their relationship to governance by associational norms or business custom, and others by state law."64 Creation of formal law does not necessarily undermine norms but simply expands the horizon of contracting choices.65 Legal structures permit a party to structure a transactional relationship that is flexible and does not rely on strict legal requirements, while maintaining a structural legal "backstop" should the relationship fall apart and behavior become too opportunistic.66 To the extent that perfectly informal, extralegal deals are economically optimal, they should supplant formal contracts.67
The creation of law can supplement and enhance the ability of parties to order their private investments. This can be illustrated by the Delaware law of business organizations. Delaware provides an elaborate set of legal rules for corporations, including fiduciary duties imposed on officers, directors and controlling shareholders. These rules do not necessarily apply to partnerships, however, because the partnership agreement may override the default rules. Yet many entities choose to organize as corporations, subject to the legal rules, and many partnerships do not fully opt out of the default rules. This is a market test of the value of binding legal rules.
The model of extralegal contracting is surely a bit utopian-one study in Russia testing the degree of success in commercial transactions found that the law-related variables were more important than those reflecting the parties' possibilities for forming long-term relationships.68 At best, voluntary, extralegal cooperation may substitute for law "when individuals repeatedly interact, when they have a great deal of information about each other, and when small numbers characterize the group."69 These circumstances are obviously limiting. Reliance on extralegal norms for contract performance requires business to forego "potentially mutually beneficial exchanges among a much larger network of trading partners for whom these conditions do not hold."70 Efforts to expand the range of business partners involve considerable transaction costs associated with ensuring the reliability of those more distant entities, and it is these "costs of transacting that are the key obstacles that prevent economies and societies from realizing well-being."71 The informal frameworks may limit transacting to members of one's family or ethnicity.72 The consequent "shortage of new firms and new people can mean a dearth of new ideas and entrepreneurship, and an inability to enter into long-term contracts can inhibit the adoption and development of complex technologies."73 Limiting one's business partners to a small number of individuals with whom one is familiar and has long transacted is not exactly a prescription for widespread competition or even specialization of functions and division of labor. Long-term contracts, where performance is not simultaneous for the parties, require an external enforcement mechanism.74 Some of the contracts most critical for economic growth depend on secure enforcement. For example, investing in a company is for the long run and requires assurance that the managers will not steal the investment.75 Even putting money into a bank to obtain interest requires similar assurances.76 A survey in the Kyrgyz Republic and Kazakhstan found that businesses relied heavily in informal arrangements, but that "growth-oriented financial transactions, such as borrowing for company expansions or investments in new product lines, are consistently linked with the use of formal legal arrangements."77 Without law, business must forego profitable alternatives.78 Law is not essential for the mere existence of free markets but may be crucial for large scale national economic growth.
Complex societies thus appear to require government enforcement of economic transactions.79 The need for government enforcement is apparent from arbitration provisions in contracts. It is relatively common for contracting parties to choose not to use a legal forum for dispute resolution but agree to arbitrate their disputes privately. Superficially, this might seem to demonstrate that a governmental legal structure is unnecessary. However, it is also relatively common for a party to reject the results in arbitration, requiring a court to step in and interpret and enforce the arbitration provision. In this circumstance, the law is essential to preserve the parties' right to choose an informal private forum for their disputes. The law also provides a benefit by providing default rules and monitoring for opportunism,80 which efficiently reduces the ex ante precautions that have to be taken by contracting parties.81 Moreover, extralegal arrangements may ironically lack the sort of adaptability and flexibility required by markets that law may offer.82
Historically, the "removal of restrictions widening the gap between private and social returns frequently required positive action by government."83 Government action can also provide other benefits for private transactions. By establishing the "basic rules of exchange," the law may substantially reduce "negotiation and enforcement costs."84 The law, rather than being antagonistic to informal norms and controls, may "invigorate" them.85 The experience of East Asia did not in fact demonstrate that private ordering could substitute for law.86 Moreover, the presence of informal networks of transacting parties may well have a "negative external effect on nonmembers" of the network.87 Contract law is still "an essential institution for an efficient market."88
While Ribstein, Ridley, and others have presented arguments for how private arrangements may substitute for and be preferable to legal enforcement, such theories are not proved. Weighing these arguments against the counter-arguments requires empirical evaluation. In addition to the evidence in Russia and Asia, and North America's broader historical evidence, there is rigorous cross-country evidence demonstrating that strong legal institutions to enforce property and contract rights are correlated with economic growth.89 This evidence should be sufficient to demonstrate that private arrangements cannot successfully substitute for legal institutions. Moreover, such arrangements may impose external costs on society.
Ellickson emphasized the importance of extralegal agreement and dispute resolution for "close-knit" groups,90 but a modern economy requires transactions that go beyond such groups. Reliance on family alliances alone may be "dysfunctional" and will create a "bias against new firms"91 established by other families. There is also a risk that the extralegal norms created by the close-knit groups may not be in the more general interest. As Ellickson observed, a "norm of `honor among thieves' may well be welfare maximizing for thieves, but welfare diminishing for society at large."92 He likewise cautioned that the "communitarian's dream of numerous small autonomous communities might end up as a nightmare of constant strife between neighboring groups."93 Even within groups, reliance on extralegal controls is more likely to result in violent self-help measures.94
Thus, in addition to the incompleteness of substitutes for the law, there is also this darker side to the absence of law and property rights. Trust alone has proved inadequate to support private markets. Free markets will arise, to some degree, even without legal guidelines. Transactions will occur between friends and when simultaneous performance ensures compliance. Yet members of such communities will inevitably seek the greater efficiency and profit of expanding the range of available transactions. Those circumstances do not ensure perfect contract compliance. In the absence of government enforcement, these parties will seek out private enforcement mechanisms for breached contracts. These private enforcement mechanisms are likely to take the form of organized crime syndicates.
When law is unavailable for the enforcement of private transactions, parties will seek out "alternative enforcers of property rights."95 These alternatives frequently employ "the threat and sometimes the actuality of violence."96 When state action is unavailable, "the enforcers might be thugs, mafia, or even the police."97 In Russia, the underground economy "ultimately led to the creation of the mafia as an alternative to government."98 As a result, the "contract killing of private businessmen has sadly become commonplace."99 The use of criminals to enforce economic arrangements is not only violent; it is an unproductive and inefficient approach to economy.100 Competition is stifled, and a "market economy dominated by illegal market activity is inefficient at best, and likely to foster inequality and exploitation."101 In Bulgaria, a study found that legal enforcement deployed "informal `mutual hostage' situations and mafia-- influenced enforcement."102 In Latin America, shortcomings in the judicial system have led to "private justice" enforced by "justicieros or gunmen."103
Even in a relatively more economically developed nation like Japan, these alternative enforcers of private ordering agents include mobsters known as yakuza.104 History demonstrates that "when the law has no way of enforcing contract, the underworld provides it."105 Reliance on organized crime "closely track[s] inefficiencies in formal legal structures, including both inefficient substantive laws and a state-induced shortage of legal professionals and other rights-enforcement agents."106 An empirical analysis found that the presence of organized crime could be attributed to the weakness of legal institutions.107 Japanese victims of traffic accidents have retained organized crime syndicates in order to recover "damage payments" from other parties.108 Japanese companies make extortion payments to sokaiya, to ensure that shareholder meetings go smoothly, because of weaknesses in the nation's law of corporate governance.109 There is a "clear statistical correlation between yakuza activity and gaps in the legal infrastructure."110 As noted above, this reliance on organized crime is not unique to Japan but has occurred in many other nations when legal institutions have broken down.111 Other countries have their own versions of corporate sokaiya, when institutions protecting minority shareholder rights are absent.112 In addition to the economic limitations of purely private transactional arrangements, they may produce private enforcement arrangements that are unnecessarily violent.
C. The Exaggeration of Culture's Importance
A second challenge to the importance of legal institutions emphasizes the role of local cultures. Some have questioned the value of attempting to export the so-called "Western" notions of law and property rights to the nations in other parts of the world. They emphasize the cultural differences between nations and argue that a nation's fundamental cultural attributes, rather than its laws, are the key determinants of its society and economy. Much of the legal research on development has focused on this cultural aspect of growth. Some argued that the legal institutions that enabled the development of the West could not be transferred effectively to emerging nations in other parts of the world.113 The recent success of East Asian nations has been ascribed not to legal institutions, but rather to those features associated with the Confucian culture.114 Thus, the universalist vision of wise legal institutions could be criticized as either ineffectual or hegemonic.
Law and development research first thrived in the 1960s and 1970s with the work of such authors as David Trubek and Marc Galanter.ls At that time, scholars discussed the "legal liberalism" associated with the new institutional economics but questioned its application to developing nations. At first, the researchers seemed to embrace the growth of liberal legalism, but they increasingly questioned whether the law was anything more than a beard for authoritarian interests and whether the legal liberalism model could be effectively extended to other cultures.116 The general view of this strain of research was that the "law is not of primary importance" and that the fate of each particular country "rests upon its unique historical, cultural, economic, political and material (population, natural resources, technology base, and so for-th) mix."117 Attempting to extend Western institutions to developing nations was at best futile and at worst imperialist.118 These sociologists, sometimes called "legal peripheralists" dismissed "the legal system as ineffectual."119 The research failed to offer much of a positive vision, though, and the field soon died.120
More recently, legal academics such as Amy Chua have tried to explore the intersection of culture and development with somewhat more nuance. While not declaring hopeless the use of legal institutions to prod economic development, Professor Chua argues that "free market democracy" succeeded in the West in part because of particular societal features that are "largely absent from the developing world, and there is no reason to assume that they will be spontaneously generated by market and democratic reforms."121 She suggests that attempts to deploy markets and democracies in underdeveloped countries can produce an anti-market backlash, a retreat from democracy, or even genocidal attacks on ethnic minorities.122 The success of democratic capitalism in the West, thus, could not be replicated in foreign cultures. Others criticize "shock therapy" privatization and, in the process, suggest that legal reform efforts that impress Western legal concepts on other countries will fail.123
Evaluating the cultural argument also requires factual investigation. Capitalist marketplace transactions are ubiquitous and irrepressible. They spontaneously arise, even in what might be called noncapitalist countries.124 Absent the appropriate legal institutions, such transactions may be referred to as part of an "informal economy." Such informal markets do not depend upon the existence of a particular culture or even upon market participants sharing a culture.125 Such markets are "commonplace even in the poorest countries," though "long-term, non-simultaneous contracting is much less common."126 It is difficult to say that capitalist transactions intrinsically contradict particular cultural fundamentals.
These informal transactions that arise outside the law are sometimes referred to as the "underground economy" or the "informal economy."127 In some nations, this economy is huge, "accounting for 50 percent of GDP in Russia and Ukraine and a whopping 62 percent in Georgia."128 According to the International Labor Organization, "85 percent of all new jobs in Latin America and the Caribbean have been created in the extralegal sector."129 Claiming that many world cultures reject marketplace transactions is therefore difficult. Indeed, the notions of property rights underlying Western culture may not be local, but reflect a concept that is "deeply ingrained in the human evolutionary past."130 At least rudimentary concepts of property rights, contract enforcement, and capitalism are found even in the absence of the associated legal structures.
The presence of an enormous underground economy in a country does not demonstrate that legal structures are unnecessary, however. There is considerable waste associated with operating a business extralegally, as Hernando de Soto observed:
We found that operating outside the world of legal work and business was surprisingly expensive. In Peru, for example, the cost of operating a business extralegally includes paying 10 to 15 percent of its annual income in bribes and commissions to authorities. Add to such payoffs the costs of avoiding penalties, making transfers outside legal channels, and operating from dispersed locations and without credit, and the life of the extralegal entrepreneur turns out to be far more costly and full of daily hassles than that of the legal businessman.
Perhaps the most significant cost was caused by the absence of institutions that create incentives for people to seize economic and social opportunities to specialize within the marketplace.... Being unable to raise money for investment, they could not achieve economies of scale or protect their innovations through royalties and patents.131
While "bad law" may "discourage the entry of the informal economy into the official economy,"132 it seems unlikely that a nation's culture somehow dictates that transactions must be conducted illegally and underground.133
It remains common to attribute great importance to culture as a determinant of economic growth and a barrier to the development and operation of legal institutions which facilitate development. Studies of immigrants by Thomas Sowell and others have urged that the relative success of ethnic groups can be deterministically explained by "culture"134 with some ascribing the economic failings of various population groups to a lack of competitiveness, lack of trust, or taste for conspicuous consumption.135 Assessing the validity of these claims, though, is frustrated by the fact that notions of "culture" are "suspiciously flexible, maddeningly ambiguous, and ultimately elusive."136
More seriously, the deterministic view treats culture as if it were an immutable and exogenous genetic fact of certain populations.137 In reality, "culture" is a more complicated phenomenon, and what passes for culture is seldom truly innate to a region's people.138 Culture may instead represent a response to external conditions and change as those conditions change.139 The very nature and institutions of the law may themselves influence or even redirect culture.140 Many cultural features suggest the presence of underlying self-interest, and a historic review of cultural features suggests that they are "quite often shaped by politics."141 The law "influences conventional understandings of value."142 Fuller suggests that it was the law that made murder culturally taboo, rather than vice versa.143 The same is true of other behaviors, such as tax compliance.144 The American South clearly had a cultural norm of racism and segregation that for a time was reinforced by the law but later largely overcome due in significant part to legal change.145
A society's culture may be an endogenous product of societal institutions, or even a state of poverty itself, rather than an exogenous constraint that controls the effect of institutions.146 Fareed Zakaria observed: Cultural explanations persist because intellectuals like them. They make valuable the detailed knowledge of countries' histories, which intellectuals have in great supply. They add an air of mystery and complexity to the study of societies... [sic] But culture itself can be shaped and changed. Behind so many cultural attitudes, tastes, and preferences lie the political and economic forces that shaped them.147
Much of what passes for culture "is not the inevitable result of people's ethnic or idiosyncratic traits but of their rational evaluation of the relative costs and benefits of entering the legal property system."148 As the rules of that system change, so will rational behavior. An anthropological investigation of sixty pre-industrial societies found that their cultures of production and distribution could largely be explained by standard economic variables.149 Another study of marriage and family systems found that "the economic determinants of these social customs are statistically significant."150
Economists may regard culture as a factor that determines an individual's "tastes" or "preferences." While such tastes are often treated as exogenous to a system, they may in fact be altered by different legal regimes. Robert Cooter has explained several ways in which this may occur, albeit in a slightly different context.151 He describes how the law can influence a party's tastes for civic participation and other values, for example, through expressions of intent by a "credible state."152 It is of course faithful legal practice that lends credibility, so that legal rules and procedures may be central to the modification of cultural practices. Cooter notes that for "bad men" the import of the law may only be its deterrent effect but society also contains "good people" who ethically adhere to the law.153 Although he suggests that the law may be especially effective when aligning itself with preexisting cultural attributes,154 when those attributes are perverse he also observes that such values "are sufficiently malleable for law and policy to influence them in ways affecting the working of the state."155 "Culture" is not necessarily exogenous and immutable. Neither is it necessarily worthy of respect, as local cultures have historically engaged in various despicable practices.
Economic difficulties in the nations of Africa may be attributed to cultural factors. In the African continent, land ownership has historically been viewed as "communal" rather than with the individualistic approach associated with property rights.156 Yet despite this culture and the lack of legal institutions that guarantee individualistic property rights, parties have acted so as to create individual ownership of land.157 Moreover, the legal institutions in Africa have steadily but slowly evolved in the direction of individualism.158 Africa's economic difficulties may be centrally attributed to weaknesses in their legal institutions.159
While some may ascribe East Asia's economic success to its culture (called "East Asian exceptionalism"), the historic record in Asia is also contrary to such explanations. As Professor Chua notes, Confucianism was "touted as wealth promoting ... until the recent Asian financial crisis."160 It was actually "deviations from Japan's Confucian past [that] in large part explain its extraordinary economic success."161 Culture was not the basis of the East Asian "miracle economies"-they shared the same culture in the decades before their economic successes, and their relative levels of economic success varied considerably.162 In Korea, the rate of economic growth clearly varied with government policies.163 An in-depth study of the recent record of six East Asian economies over thirty-five years set out to test whether law was important or irrelevant and whether different cultures should rely upon different legal structures.16 The authors found that the nations had undergone legal change, primarily associated with the importation of Western legal concepts.165 They further found that this change had apparently contributed to rapid economic growth among these countries.166 In Asia, as in the West, legal institutions are key to economic growth.
One of the common cultural characteristics that supposedly interferes with legal institutions and capitalist markets is ethnic division, and research has found an effect of such divisions on economic growth.167 It would be unsurprising that such ethnic division would have some adverse effect on a country, if only because it surely complicates governance to have populations deeply divided by background and language. This division may be captured by a variable called ethnolinguistic fractionalization, which "estimates the probability that two persons, randomly selected among a country's population, will belong to two different ethnic groups."168 A recent study of African nations found that once institutional variables were accounted for, ethnolinguistic fractionalization had no statistically significant effect on growth.169 Indeed, the only equation in which ethnolinguistic fractionalization was significant found that it had a positive effect on growth. 170 The study's rule of law variable, by contrast, had a significant impact on growth.171 While there may be an apparent negative association between ethnolinguistic fractionalization and economic growth, it has disappeared when control variables are introduced.172
There should be little doubt that cultural variables will have an effect on economic growth. For example, some cultures deny education and equality of opportunity to women. Those restrictions are the economic equivalent of a fighter tying one of his hands behind his back. Abandoning a vast pool of human resources must inevitably harm economic growth.173 But this cultural feature, like others, is not immutable. The extension of legal rights to women will alter such a culture and, coincidentally, enhance its economic welfare.174
There is relatively little persuasive evidence that culture has a predominant economic effect that overrides the importance of legal institutions. The effects of culture might readily be distinguished from the effects of institutions, simply by examining the behavior of immigrants. It is established that some immigrant groups have had greater success.175 However, that may only prove that the group is more quickly adaptable to a different set of circumstances, not that cultures are impervious to such circumstances. Some have asserted that cultural factors are crucial to individual savings, but a more rigorous study of immigrants had found no cultural effect on savings behavior. 176 Many immigrants from other cultures have thrived under the legal institutions and free market system in the United States. 177 This fact suggests that such institutions and markets may well have a positive effect in other countries.
Rather than undermining the effect of legal institutions, cultural issues may simply make them all the more important. Thus, "good institutions are most necessary and beneficial where there are ethnolinguistic divisions."178 Legal institutions may provide the "social glue" for transactions that is necessary when society is so divided. 179 A World Bank study found that high quality institutions, such as the rule of law and property rights, mitigated the adverse economic consequences that have been associated with ethnolinguistic fractionalization.180 A very comprehensive study found that legal systems transcended ethnolinguistic divisions and had a powerful effect on growth even with the fractionalization controlled.181 Yet another recent study found that ethnic fractionalization showed no effect on growth, once policy variables were considered.182
A recent, more rigorous, cross-country study found some effect of culture on economic growth.183 It employed sociological survey research that provided scores for various countries on features such as relative individualism, a "masculinity index," a measure of inequality, and uncertainty avoidance.184 Of the cultural factors, the author found a significant negative effect for uncertainty avoidance.185 This result is certainly consistent with economic theory, as such cultures would be less likely to embark on the entrepreneurial risk-taking associated with growth. This finding of relevance for culture does not mute the significance of traditional legal institutions-it enhances that significance. By providing better assurances of property rights and contract enforcement, the law reduces the uncertainty that may be associated with investment and may help overcome cultural barriers to economic development.
Another cross-country study found an effect for "social capital."186 Social capital was defined as the level of trust in a society, measured both in terms of trusting family members and trusting people in general.187 The author found that higher levels of trust correlated with higher economic growth rates.188 However, many other cultural factors such as Confucianism, corporatism, and values generally had no effect! 89 While a society's culture may matter, the importance lies in these cross-cutting features such as risktaking and trust, and not in the typical region-specific features commonly assigned to culture (for example, Asian culture, Islamic culture, and others).190 This research also found that the level of financial investment was much more significant than even the social capital for economic growth. 191 Other research has found some economic effect of a country's race and religion but a significant independent positive effect of liberty and democracy after controlling for race and religion.192 Thus, cultural factors should be conceived of as more of a complement to traditional legal and economic explanations, rather than as a barrier to or substitute for such explanations.193
It would be foolish to say that a society's culture is irrelevant to any aspect of that society, especially a significant one like economic growth.194 But the ultimate significance of these cultural factors has not been demonstrated.195 North emphasized the importance of "culturally derived norms of behavior" and their interaction with the formal legal rules.196 However, culture is not destiny. The critical institutional legal rules and institutions for growth need not be precluded or obstructed by cultural barriers, as the empirical evidence shows. The implementation of certain basic principles of law and economics may have to be adapted to local situations.197 While it is undoubtedly true that transplanting legal institutions in new cultures will work imperfectly, the transplantation procedure may still be the most pragmatic and effective approach to development.198 Joel Trachtman suggests that those engaged in law and development unfortunately "oscillate between arrogance and modesty," when the best answer is to rely on the "confidence earned by methodologically sound and contextually sensitive analysis that will be used not to dictate solutions but to inform politics in the emerging market country."199
The theoretical debate over the relevance of culture cannot ultimately answer the question. The ability of culture to render legal reform ineffectual will instead appear in the empirical evidence. If a change in legal institutions has a significant societal impact in different cultures, that is evidence that culture is not a barrier to the positive economic effects of law. The empirical data is also a test for whether legal substitutes can be effective in facilitating societal economic growth.
II. Empirical Research on Law and Economic Growth
Empirical research on law and economic growth has burgeoned of late, with much of the work done by international economic organizations, such as the World Bank and the International Monetary Fund. Before reviewing this research, some context is required. The law may be a necessary but not sufficient condition for growth, or it might be neither strictly necessary nor sufficient, but just a contributing factor. Certainly, many other variables have an effect on growth, such as social capital (the relative level of interpersonal trust in a society), human capital (the relative level of a population's education and skills), resources, and even climate. The existence of these factors will tend to obscure the true effect of law, so that it can be difficult to empirically extract even an authentic association between law and economic growth, amidst the noise of other influential factors. Hence, it will be difficult to even identify a true association. One might expect to find results only for the most substantial legal and institutional variables, though other rules might still have some meaningful economic effect.
While it is unlikely that we can find general economic growth effects from a particular antitrust doctrine, for example, an effect might be found from major legal variables, such as the presence of democracy, property rights, judicial independence, and the extent of government regulation. Such findings may also guide us on more specific legal questions. A finding that recognition of individual freedom is generally wealth-enhancing, for example, would suggest, if not prove, that positive economic benefits may result from particularized expansions of such freedom, even if those expansions are not in themselves so significant as to produce empirically identifiable benefits.
Perhaps the most significant topic of ongoing empirical research is the effect of democracy on economic growth. While democracy is not readily quantifiable, it has been operationalized by measures of free electoral process, freedom of opposition parties, and the presence of more than one significant party.200 Democracy might be expected to contribute to growth because authoritarian regimes may be predatory expropriators of wealth 201 and because accountability and competitive political markets create an incentive for democratic leaders to increase the welfare of their constituents.202 Some, however, argue that democracy itself is predatory and redistributive and that democratic regimes lack the ability to make the longterm commitments necessary for true economic reform.203
Empirical evidence is needed to resolve the dispute over the economic effects of democracy. This evidence, though, does not produce consistent results. Przeworski and Limongi reviewed eighteen studies, eight of which found that democracies developed faster, eight of which found that authoritarian regimes grew faster, and two of which found no difference.204 It is intuitively difficult to believe, though, that such a central and important feature of governance as democracy has no economic effect. The inconsistent research may fail to account for complicating factors, or it may be that democracy may enhance economic welfare under some background circumstances, but may be counterproductive under other circumstances.205 There is also a simultaneity or reverse causation difficulty in the empirical evidence-in the studies showing a positive effect, it may be that democracy produces growth, but it could be that growth produces democracy.206
A recent study by Jenny Minier appears to provide the best evidence for understanding the link between democracy and economic growth.207 Her study focused on significant changes in a country's level of democracy, rather than its absolute level, which enables a check on the reverse causation problem. Any time a regime changes, there is instability and a need to establish new institutions, which are generally bad for economic growth.208 However, she found that new democracies did not suffer the expected slowing of growth but in fact did well economically.209 She also broke down the countries of the world into groups in a regression tree analysis, differentiating between poor and rich countries and varying levels of literacy, finding that democracies tended to have better education and more investment.210 In addition to finding that countries becoming democratic grew faster than expected, countries that saw a drop in their level of democracy grew more slowly in both the short run and the long run.211
No study provides the final word on social scientific questions, but Minier's well-designed study does provide persuasive evidence that democratization of government enhances growth. Its persuasiveness is enhanced by other research finding that democracies tend to have greater property rights than do autocracies.212 Democracy appears to be a legal structure that contributes to a society's economic welfare. While this macro-level finding does not directly inform us about the merits of more detailed democratic rules (such as particular laws governing elections and recounting), it could suggest that the more democratic among a choice of rules may likewise contribute to economic growth. However, one can imagine that there is some optimally democratic point, beyond which additional democracy (e.g., direct democracy and the elimination of representatives as intermediaries) would be contrary to economic well-being.
Another well-studied legal determinant of growth is economic freedom. This concept is generally operationalized as the establishment of secure property rights and the freedom to engage in voluntary transactions that are enforced by government.213 There are various scales that have been used to measure relative international levels of economic freedom.214 These indices, though, have a number of components that would not be considered legal rights, or even legal matters at all.215 An alternative measure uses investor guides, based on the expert opinions of private professional consultants who assess the legal institutions of nations.216 Still another measure is "contractintensive money" (CIM),217 which measures the extent of money held in banks or invested in other financial institutions or instruments. This may be directly explained by the relative availability of government enforcement of contracts in a nation.
All of the above measures have been used for empirical research regarding the effect of economic freedom on economic growth. Research by the Fraser Institute and Heritage Foundation authors has found that their indices are significantly correlated with growth.218 One study broke down the Fraser Institute index and found that institutional market frameworks (including property rights, the rule of law, contract viability, and guaranteed political liberties) were especially important for growth, more important than limited government.219 Empirical research using the investor guides has likewise found that economic liberty was a significant determinant of growth.220 The same is true for CIM-based research.221 While this research has the same potential simultaneity problem as the democracy research, empirical evidence exists to suggest that it is economic freedom which produces growth.222 Yet the research has not hitherto established that the relationship is a linear one in which more economic freedom will always contribute to greater growth.
Another important factor that has occupied some legal research is the rule of law. This factor is a procedural one, independent of the substantive content of the law.223 It is also very difficult to operationalize for empirical research, though it is estimated in some of the investor guides. The World Bank has embarked upon a major research program on the importance of the rule of law, including a private sector survey of over 3800 enterprises in 73 countries.224 They produced a general government credibility indicator for variables such as political instability, the security of persons and property, the predictability of judicial enforcement, and corruption. When the credibility indicator was disaggregated into its components, the most robust predictor of growth was the predictability of judicial enforcement, which was significant in every regression.225 The rule of law appears to be particularly important to entrepreneurial enterprises.226
The structure of the judiciary may be critical to preserving the rule of law, but the precise structural requisites are not clearly established. Some suggest that an independent judiciary is an institution central to the preservation of the rule of law.227 The theory supporting this position is somewhat obscure, though. If democratic institutions further growth, why would a relatively nondemocratic independent judiciary be a positive? Truly independent judges may become arbitrary or corrupt and thereby undermine the rule of law. The functioning of the rule of law may also be dependent on the resources provided to the judicial branch, or the nature of the bar, or the structuring of the legal system as common or civil law.228
Researchers increasingly have studied the effect of government regulation on economic development. The new institutional economics may be caricatured as propounding a laissez faire ideology, where the primary role of government is to create property rights and enforce contracts and then get out of way of the market. While some subscribe to this position, it is not a necessary one. Coasean theory calls for "government intervention whereever such intervention reduces transaction costs below those that would exist absent government intervention: it is a rationalization of regulation, not a condemnation."229 Free markets may not promote developmental efficiency for a variety of reasons, including information asymmetries. Empirical analysis is necessary to understand the effects of government regulation.
The best-studied area of public regulation is securities law. A larger and more liquid securities market demonstrably contributes to economic growth.230 Some have argued, as a theoretical matter, that the U.S. securities laws, such as prohibitions on insider trading, interfere with a free market in securities and thereby hamper economic growth.231 However, there is considerable empirical evidence that the regulation of information found in federal securities law fosters economic growth.232 Research particular to insider trading laws have found that they also tend to support stronger equity markets.233 It seems clear that government regulation of securities fraud is conducive to the development of stock markets and the associated benefit of economic growth.
Other forms of regulation have not been so well-studied for their economic effects, but there is evidence of value. A study of banking regulation in more than one hundred countries found that "regulations that encourage and facilitate the private monitoring of banks tend to boost bank performance, reduce nonperforming loans, and enhance bank stability."234 Antitrust and other competition laws may benefit economic development.235 Insofar as environmental laws protect against the externalization of costs and protect public goods, they too might be expected to provide economic benefits.
Just as every successful world economy recognizes property rights and enforces contracts, "every successful market economy is overseen by a panoply of regulatory institutions, regulating conduct in goods, services, labor, asset, and financial markets."236 It would be closed-minded to blindly attribute economic growth to the former (property rights) but not the latter (regulation). There is reason, both theoretical and empirical, to think that some forms of government regulation of markets may contribute to economic development. Of course, government regulation may also seriously interfere with growth. Empirical analysis is needed to distinguish between beneficial and counterproductive regulatory approaches.
III. The Need For Additional Legal Research
While law and governance institutions, broadly defined, clearly are relevant to economic growth, that finding by itself is not very helpful. For practical purposes, governance requires an understanding of precisely what laws and implementing organizations are most effective at enhancing growth and what actions might affirmatively interfere with such growth. While the role of law may be important in promoting growth, it is clear that more law is not always better than less law. One cannot even generally say that "more" or "stronger" property rights are better than fewer or weaker property rights. Lon Fuller stressed that while property and contract rights are vital to growth, a legal system must restrain the "rigidities of property and contract[s]" so that the society can "direct its resources toward their most effective use."237 Interest groups may demand the creation of inefficient property rights that amount to rights to a monopoly status. The creation of property rights in, say, continued employment at a private company could be economically counterproductive and increase unemployment levels.TM So the questions are regarding what property rights are beneficial and how they best should be enforced.
Property rights may be viewed merely as protection of private owners against state expropriation. Even in the absence of such a threat from the state, though, property rights may be seriously limited by legal constraints on alienability or collateralization.239 There are different bundles of legal entitlements associated with property rights and the composition of those bundles may be critical to the economic consequences of those rights. Such rights may be of limited utility absent effective judicial systems, and they may also require some sort of credible commitment to future preservation of effective property rights.
In some circumstances, even the most traditional property rights, widely recognized as economically valuable, may affirmatively interfere with growth. De Soto ascribes the great economic expansion of the United States to the fact that it abandoned conventional British common law and violated the property rights of large landowners in order to grant titles to squatters and spread property rights to a larger number.240 Experience in Peru shows that programs to provide property to the poor "have failed over the past 150 years whether they followed the bias of the right (protecting property through mandatory law) or of the left (protecting poor people's land in governmentrun collectives)."241 There is no obvious simple recipe for success. Studies around the globe have found that titling ownership in real property has sometimes, but not always, been economically beneficial.242 While the protection of some property rights is now recognized as invaluable to economic expansion, the issue is not really a binary one. Key questions consider the scope of the rights and the circumstances in which they may be enforced, or compromised.
Even the "rule of law" cannot simplistically be regarded as beneficial. The rigid application of laws may be an economic problem. Latin American courts have been criticized for their "strict adherence to legal form and the letter of the law."243 While a stable legal system has benefits, a "modern market economy requires laws that are able to adapt" and there is a "tremendous flexibility that the legal and judicial systems require in order to adapt laws to a dynamic economic system."244 The stabilizing benefits of precedent may become stifling in effect.
While new institutional economists have often focused on private law, public law may also play a substantial role in economic growth. Interventionist state policies may in fact contribute to economic success, at least within a generally capitalist framework. The East Asian miracle could be attributed to an activist, even mercantilist, state that created cartels, channeled capital investments, and subsidized research.245 After their initial takeoffs, however, these nations have migrated in the direction of more traditional economically liberal policies.246 The optimal legal rules may depend upon the underlying economic situation of a nation.
One legal question of some importance is the extent to which constitutionalization of law matters. William Riker has declared that "every time I convince myself that I have found an instance in which constitutional forms do make a difference for liberty, my discovery comes apart in my hands."247 Constitutional protections may represent nothing more than parchment declarations without real world effect. Some empirical research suggests that constitutional recognition of rights is not significant.248 Other research suggests that such provisions may sometimes have an effect, depending on the circumstances of other institutions.249 Beyond constitutionalization, there is a question whether the substantive content of any law genuinely matters, or whether all is politics and results are contingent on institutional arrangements rather than legal text. One study has, intriguingly, found that constitutional protection of religious freedom seems to be a significant factor in the protection of economic freedom.250
Legal academics are positioned to make a substantial contribution to the investigation of law and economic growth and help answer questions such as the importance of constitutionalization and legal text. The participation of law professors would undoubtedly enhance the accuracy of the measures of factors such as property rights and rule of law. Those who are familiar with the law may also identify other variables that might appropriately be employed in the empirical investigations, variables that economists or political scientists may overlook. Legal academics may also broaden the scope of the research and address relatively unexplored areas of the law.
The study of tort law offers much promise. Legal academics are in the best position to assess differences, both substantive and procedural, in comparative laws of tort liability and design research to test for the effects of such differences. One might expect such standards to have material economic impact. To the extent that such law internalizes the costs of production, it should contribute to economic efficiency and growth, but commentators have conversely lamented that tort litigation can be oppressively redistributive and inefficient. Some limited research on data from eleven nations found no significant effect of tort litigation on economic well-being.252
Law professors may also contribute to study of the practical functioning of legal institutions. While considerable attention has been paid to judge and court systems, the role of lawyers should be examined. Attorneys are agents and producers of the law, who may serve as transaction-cost engineers that facilitate the development of business enterprises.253 Yet the same legal profession that may be "necessary for growth" is also the group bestpositioned "to sabotage capitalist expansion."254 The raw number of lawyers may affect it's growth rate, as "developing countries face serious shortages of lawyers with the training and skills to play these roles in a market economy."255 Some economists have argued that the U.S. and other nations have too many lawyers with a negative economic effect,256 though these studies are disputed.257 More important than raw numbers may be the local legal culture258 or the self-regulation practices of the bar.
IV. Conclusion
The advancement of economic well-being is an important societal objective. The law may play an important role in achieving that objective. Yet law professors have not attended to this relationship as much as they should. The importance of legal institutions and governance for economic growth is now relatively well-accepted in the economics profession. The association has been well-demonstrated, both theoretically and empirically. But this generalized finding of economists leaves many of the most important questions unanswered.
Those of a "law and economics" bent have certainly helped explicate some aspects of the association between legal rules and economic development. Within law schools, though, this research has been produced by a small segment of the professoriate and has not been particularly comparative or even commonly empirical. Nor has it been especially evenhanded. Broader research is needed on the economic effects of law. This need not take the form of large cross-country studies such as most of those I have described. Individual country studies of legal change are informative. Within the United States, comparisons of state laws may inform. At whatever level, it would behoove legal academics to conduct additional research on the practical consequences of the law, including economic growth.
FOOTNOTE1. See, e.g., Philip M. Nichols, A Legal Theory of Emerging Economies, 39 VA. J. INT'L L. 229, 236-39 (1999) (discussing how such research has focused on individual countries and failed to develop the necessary overarching theories). One might suspect that many law professors feel that a focus on wealth and economics seems mundane when compared to the great issues of justice, rights, and fairness with which those professors usually grapple. Such a view is quite shortsighted, however. Economic welfare is central to human well-being and relevant to human development and the exercise of freedom.
2. "[W]ritings in the `law and economics' genre are especially noteworthy for their insistent 'micro' focus." Ronald A. Cass, Black Robes and Blacker Boxes: The Changing Focus of Administrative Law, 1984 DUKE L.J. 422, 433 (book review).
3. I must anticipate the threshold objection that economic growth is not the goal of the law, which might be characterized as freedom and justice. See, e.g., Ronald M. Dworkin, Is Wealth a Value?, 9 J. LEGAL STUD. 191 (1980) (criticizing the theory that law should concern itself with increasing wealth); Jules Coleman, Economics and the Law: A Critical Review of the Foundations of the Economic Approach to the Law, 94 ETHICS 649 (1980) (challenging the philosophical basis of a wealth-maximization objective). While I would concede that economic growth is not the sole objective worth considering in the law, it would be odd to suggest that it should not be one of the central concerns of a legal system. Overall economic growth is instrumental to the more general well-being of a society, including the welfare of disadvantaged groups. Thus, "wealth maximization may be the most direct route to a variety of moral ends," including political rights, liberty, dignity and contentedness. RICHARD A. POSNER, THE PROBLEMS OF JURISPRUDENCE 382 (1990). Economic growth leads to more collective goods advanced by regulation and redistributive benefits such as health insurance and unemployment benefits. Carles Boix, Democracy, Development, and the Public Sector, 45 AM. J. POL. So. 1 (2001) (reporting empirical results to this effect). It is ironic that liberals may place less value on economics, because growth tends to drive public policies in a liberal direction, while economic difficulties cause such policies to shift to the right. Randolph T. Stevenson, The Economy and Policy Mood& A Fundamental Dynamic of Democratic Politics?, 45 AM. J. POL. Sci. 620 (2001) (reporting this empirical result in a study of developed nations). While economic growth may be demeaned on distributive grounds, the empirical evidence shows that such growth directly benefits the poor, in both developed and developing nations. See, DAVID DOLLAR & AART KRAAY, GROWTH IS GOOD FOR THE POOR,
FOOTNOTE(World Bank Research Paper, 2000), available at http://www.worldbank.org/research (reporting results from a sample of eighty countries over four decades and finding that income of the poor rises proportionately with overall economic growth); CASS R. SUNSTEIN, FREE MARKETS AND SOCIAL JUSTICE 210 (1997) (reporting that "[t]ime and again it has been shown that economic growth can do more than welfare and employment programs to benefit the disadvantaged"); THE WORLD BANK, BUILDING INSTITUTIONS FOR MARKETS 75-96 (2002), available at http://www.wds.worldbank/org/servlet/WDSServlet?pcont=details&eid--4946_010922040165 (reviewing research demonstrating that a developed financial system benefits the poorer segments of society and improves income distribution). Choosing to ignore the economic consequences of law is not in the interest of human welfare and is presumably antidemocratic, insofar as the people clearly seek economic growth. See, e.g., Douglas A. Hibbs, Jr., Bread and Peace Voting in U.S. Presidential Elections, 104 PUB. CHOICE 149 (2000) (demonstrating the significant effect of economic variables on voters' choices). Even if total national wealth is not a good thing per se, it plainly contributes to very valuable ends.
4. See, e.g., Martin Leschke, Constitutional Choice and Prosperity: A Factor Analysis, 11 CONST. POL. ECON. 265, 266 (2000) (noting that cross-country studies have found the importance of economic freedom to prosperity but generally "do not try to examine systematically which of the components that enhance freedom contribute to a nation's prosperity"). Leschke emphasized the need for "empirical measures by which policy decisions and actions can be meaningfully assessed." Id. at 277.
FOOTNOTE5. Indeed, the failures of law-reform efforts in post-communist nations have been attributed to reliance on economists at the expense of legal experts. See Rolf Knieper & Mark Boguslavski, Concept for Legal Counseling in Transformation States, in MAKING DEVELOPMENT WORK 115, 116-17 (Ann Seidman, Robert B. Seidman & Thomas W. Wade eds., 1999) (reporting that the experts who advised on law reform were "not members of the legal profession, but rather economists" who produced a "flood of often highly contradictory texts from a wide variety of sources and with greatly differing hierchical status").
FOOTNOTE6. DANI RODRICK, INSTITUTIONS FOR HIGH-QUALITY GROWTH: WHAT THEY ARE AND How To ACQUIRE THEM 2 (Nat'l Bureau of Econ. Research, Working Paper, No. 7540, 2000), available at http://www.nber.org/papers/w7540.
7. See id. at 4 (observing that "[i]nstitutions do not figure prominently in the training of economists").
FOOTNOTE8. Ironically, natural-resource endowments are generally a negative factor for economic growth. The immediately available wealth from natural resources was a readily available economic rent to be seized by the politically powerful. Historically, "the resource-poor countries' economic performance tended to be much better, on average, than that of those with abundant natural resources." DEEPAK LAL, UNINTENDED CONSEQUENCES: THE IMPACT OF FACTOR ENDOWMENTS, CULTURE, AND POLITICS ON LONG-RUN ECONOMIC PERFORMANCE 3 (1998).
FOOTNOTE9. See, e.g., Michael J. Trebilcock, What Makes Poor Countries Poor?: The Role of Institutional Capital in Economic Development, in THE LAW AND ECONOMICS OF DEVELOPMENT 16 (Edgardo Buscaglia, William Ratliff & Robert Cooter eds., 1997) ("[A]ccording to neoclassical theories of growth, countries that are capital intensive (developed economies) will have lower marginal products of capital and thus lower investment rates and economic growth, while countries that are labor intensive (developing countries) will grow faster. This implies a convergence in growth rates over time.").
10. See, e.g., Mancur Olson, Jr., Big Bills Left on the Sidewalk: Why Some Nations are Rich, and Others Poor, J. ECON. PERSP., Spring 1996, at 3, 14 (noting that "the dramatically uneven distribution of capital around the world contradicts the familiar assumption that all countries are on the frontiers of aggregate neoclassical production functions"); Leschke, supra note 4, at 266 (reporting that the predictions of neoclassical models "do not match reality"). This finding is not a basis to disregard the theory behind the neoclassical models. In fact, there is empirical evidence that such models do capture some reality. See, e.g., Peter Howitt, Endogenous Growth and CrossCountry Income Differences, 90 AM. ECON. REV. 829 (2000) (discussing evidence of convergence under the neoclassical model). However, the neoclassical models are clearly oversimple and require supplementation by consideration of legal institutions.
11. See Philip Keefer & Stephen Knack, Why Don't Poor Countries Catch Up? A CrossNational Test of an Institutional Explanation, 35 ECON. INQUIRY 590, 590 (1997) (arguing that "deficient institutions" underlie the divergence). Nor does capital shift to poorer nations, as the theory projects. See Robert E. Lucas, Jr., Why Doesn't Capital Flow from Rich to Poor Countries?, 80 AM. ECON. REV. 92, 92 (1990) (observing that flows of capital from rich countries to poor countries fall far short of the flows predicted by neoclassical models of trade and growth). However, once one controls for institutional effects, convergence may occur. Keefer & Knack, supra, at 597 (reporting findings that "[n]ot only is growth faster when institutions are better, so also is convergence").
12. See, e.g., GERALD W. SCULLY, CONSTITUTIONAL ENVIRONMENTS AND ECONOMIC GROWTH 9 (1992) (reporting that "[n]othing in the neoclassical theory considers the institutional framework in which capital (physical and human) is accumulated, invention or innovation is made, or inputs are converted to output").
13. For a brief review of the new institutional economics, see CHRISTOPHER K. CLAGUE, The New Institutional Economics and Economic Development, in INSTITUTIONS AND ECONOMIC DEVELOPMENT: GROWTH AND GOVERNANCE IN LESS-DEVELOPED AND POST-SOCIALIST COUNTRIES 13 (Christopher K. Clague ed., 1997).
FOOTNOTE14. See DOUGLASS C. NORTH, INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE 7 (1990) (reporting that "[r]ulers devised property rights in their own interests and transaction costs resulted in typically inefficient property rights prevailing"). See generally THRAINN EGGERTSSON, ECONOMIC BEHAVIOR AND INSTITUTIONS 250-77 (1990) (describing traditional "naive theory" that property rights will arise whenever they contribute to efficiency and how it has been abandoned in favor of an interest group theory describing development of such rights). In fact, most governments "do not supply structures of property rights that are appropriate for placing the economy close to the technical production frontier." Id. at 320.
15. Fareed Zakaria, Lousy Advice Has Its Price, NEWSWEEK, Sept. 27, 1999, at 40.
16. See Helen E. Jung, Former UW Professor Wins Nobel Prize, SEATTLE TIMES, Oct. 12, 1993, at A3, available at 1993 WL 6021548 (stating that Douglass North won the Nobel Prize in Economics for work "applying economic theory to understand history").
17. See DOUGLASS C. NORTH, STRUCTURE AND CHANGE IN ECONOMIC HISTORY 5 (1981) (stating that his "model assumes an incentive structure that will allow individuals to capture the returns to society of investment").
18. Id. See also Timothy Besley, Property Rights and Investment Incentives: Theory and Evidence from Ghana, 103 J. POL. ECON. 903, 903 (1995) (reporting that the "evolution of property rights and their effect on investment are central issues in the political economy of development" and that "the role of the state in codifying and protecting such rights is regarded, in many contemporary and historical discussions, as important to providing the preconditions for economic growth").
19. Id. at 6. See also Eggertson, supra note 14, at 341 (discussing how the failure to provide certainty of property rights, requires investors to make "various adjustments to minimize the risk of appropriation" that in turn "tend to lower the level of investment activity and change its nature").
20. Trebilcock, supra note 9, at 19. 21. NORTH, supra note 17, at 6.
FOOTNOTE22. See id. at 17 (asserting that "[ultimately it is the state that is responsible for the efficiency of the property rights structure, which causes growth or stagnation or economic decline").
23. Id. at 20. 24. Id. at 147. 25. Id. at 147-57.
26. Rodrick, supra note 6, at 5.
27. Hernando de Soto, Preface to THE LAW AND ECONOMICS OF DEVELOPMENT, supra note 9, at xiii.
28. See, e.g., Alan B. Krueger, Economic Scene, N.Y. TIMES, Mar. 29, 2001, at C2 (quoting Professor Jan Svejnar of the University of Michigan stating that the "`overall experience suggests that rapid mass privatization, in the absence of a strong legal system, has negative effects on performance"').
29. See, e.g., Robert M. Sherwood, The Economic Importance of Judges, 9 FED. CIR. B.J. 619, 620 (2000) (reporting that "North's views have been warmly received and widely accepted"); Pierre Englebert, Pre-Colonial Institutions, Post-Colonial States, and Economic Development in Tropical Africa, 53 POL. RES. Q. 7, 8 (2000) (referring to a "new consensus" that "it is the lack of state capacity and institutional quality which is responsible for economic stagnation in Africa"); Rafael La Porta et al., The Quality of Government, 15 J.L. ECON. & ORG. 222, 222-23 (1999) (reporting that the "importance of good government for growth thus appears to be a well-established empirical proposition").
30. Charles Cadwell, Foreword to MANCUR OLSON, POWER AND PROSPERITY, at vii, viii (2000).
FOOTNOTE31. HERNANDO DE SOTO, THE MYSTERY OF CAPITAL (2000). 32. Id. at 32.
33. Id. at 44 (observing that it is "formal property that provides the process, the forms and the rules that fix assets in a condition that allows us to realize them as active capital").
34. Id. at 50. 35. Id. at 158.
36. Id. at 20 (observing that the time required to gain recognition of legal land rights in Haiti was nineteen years).
37. See NORTH, supra note 17, at 18 (noting the importance of the "articulation of a set of moral and ethical behavioral norms to reduce enforcement costs"). He notes that "[t]o the extent that the participants believe the system fair, the costs of enforcing the rules and property rights are
FOOTNOTEenormously reduced by the simple fact that the individuals will not disobey the rules or violate property rights even when a private cost/benefit calculus would make such action worthwhile." Id. at 53.
38. See, e.g., Tom Ginsburg, Does Law Matter for Economic Development? Evidence from East Asia, 34 LAW & SOC'Y REV. 829, 830 (2000) (observing that "some have claimed that the rule of law is dispensable in the pursuit of economic growth"); Richard A. Posner, Creating a Legal Framework for Economic Development, 13 WORLD BANK RES. OBSERVER 1, 2 (1998) (reporting that there "are many informal substitutes for the legal enforcement and protection of property and contract rights" including arbitration and reputation).
39. AMANDA J. PERRY, International Economic Organizations and the Modern Law and Development Movement, in MAKING DEVELOPMENT WORK, supra note 5, at 19, 28.
40. Timothy Frye, Contracting in the Shadow of the State: Private Arbitration Commissions in Russia, in THE RULE OF LAW AND ECONOMIC REFORM IN RUSSIA 123, 123 (J.D. Sachs & K. Pistor eds., 1997).
FOOTNOTE41. Id. at 128.
42. See id. at 133.
43. ROBERT C. ELLICKSON, ORDER WITHOUT LAW (1991).
44. The ranchers' resolution of these matters was not conducted in the "shadow of the law" and driven by legal rules. Ellickson found that the parties were essentially oblivious to what the formal legal standards were. See id. at 141 (noting that ranchers were ignorant of substantive legal rights on boundary fences and badly misperceived legal requirements on highway collisions with livestock).
45. Id. at 138.
FOOTNOTE46. See Lisa Bernstein, Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J. LEGAL STUD. 115 (1992).
47. See Lisa Bernstein, Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms, and Institutions, 99 MICH. L. REV. 1724 (2001).
48. See, e.g., Robert O. Cooter, Structural Adjudication and the New Law Merchant: A Model of Decentralized Law, 14 INT'L REV. L. & ECON. 215 (1994) (discussing land tenure in Papau New Guinea and finding that shift from a relationship-based economy to formal property ownership would be disruptive and counterproductive); Jonathan R. Macey, Public and Private Ordering and the Production of Legitimate and Illegitimate Legal Rules, 82 CORNELL L. REV. 1123, 1140 (1997) (arguing that "private ordering generates substantive legal principles that are superior to those that the state produces").
FOOTNOTE49. Bruce L. Benson, Economic Freedom and the Evolution of Law, 18 CATO J. 209, 229 (1998). See also SATU KAHKONEN & PATRICK MEAGHER, OPPORTUNISM KNOCKS?: LEGAL INSTITUTIONS, CONTRACTING, AND ECONOMIC PERFORMANCE IN AFRICA 24 (Ctr. for Institutional Reform and the Informal Sector, Working Paper No. 204, 1997) (discussing "the extent to which non-state contract enforcement is preferable to a more rigid and predictable state system in countries at a low level of economic development and prone to economic shocks"); JEAN. JACQUES DETHIER, GOVERNANCE AND ECONOMIC PERFORMANCE: A SURVEY 31-32 (ZEF Discussion Paper No. 5, 1999) (describing the view that formal legal systems may not be preferred options for enforcing contracts and rights).
FOOTNOTE50. See generally Larry E. Ribstein, Law v. Trust, 81 B.U. L. REV. 553 (2001). 51. Id. at 570.
52. See id. at 576-85 (presenting "trust-based arguments against law"). 53. See MATT RIDLEY, THE ORIGINS OF VIRTUE 202-03 (1996).
54. Id. at 204.
55. See generally Avner Greif, Paul Milgrom & Barry R. Weingast, Coordination, Commitment, and Enforcement. The Case of the Merchant Guild, 102 J. POL. ECON. 745 (1994).
56. RIDLEY, supra note 53, at 202.
FOOTNOTE57. See, e.g., Gillian K. Hadfield, Privatizing Commercial Law, REGULATION, Spring 2001, at 40 (arguing that private legal regimes are less expensive than government-enforced legal regimes because of government procedural inefficiency).
58. See Avner Greif, Informal Contract Enforcement: Lessons from Medieval Trade, in 2 THE NEw PALGRAVE DICTIONARY OF ECONOMICS AND THE LAw 287, 294 (Peter Newman ed., 1998) (reporting that the private customary law that arose was not especially efficient).
59. Relational deals are sometimes captured in formal contracts that depend not on the parties' enforcement of all legal entitlements but on flexible adjustments to maintain the ongoing business relationship. For discussions of relational contracts, see Richard E. Speidel, The Characteristics and Challenges of Relational Contracts, 94 Nw. U. L. REV. 823 (2000); Charles J. Goetz & Robert E. Scott, Principles of Relational Contracts, 67 VA. L. REV. 1089 (1981).
60. See Nichols, supra note 1, at 275-77 (discussing differences between formal and relational contracts).
FOOTNOTE61. There is, for example, the "right to contract around the rule" established by courts, enabling the parties to establish their own governance rules. See Bruce L. Benson, Evolution of Commercial Law, in 2 THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 88, 90-91 (Peter Newman ed., 1998).
62. Id. at 91. Indeed private contractual governance has even overridden government regulatory schemes. See Thomas Palay, Informal Contracts and Regulatory Constraints, in 2 THE NEw PALGRAVE DICTIONARY OF ECONOMICS AND THE LAw 295, 295-99 (Peter Newman ed., 1998) (reporting how private arrangements in the railroad industry altered the regulatory scheme of the Interstate Commerce Act).
63. See ELLICKSON, supra note 43, at 3-4 (describing the California setting for discussion of private ordering among ranchers).
FOOTNOTE64. Young Lee & Patrick Meagher, Misgovernance or Misperception? Law and Finance in Central Asia, in ASSESSING THE VALUE OF LAW IN TRANSITION ECONOMIES 133, 165-66 (Peter Murrell ed., 2001).
65. Formal mechanisms may even strengthen the informal basis of contracting. See CHRISTOPHER CLAGUE, Institutions and Economic Performance: Property Rights and Contract Enforcement, in INSTITUTIONS AND ECONOMIC DEVELOPMENT, supra note 13, at 69 (contending that the private arrangements for contract compliance may be dependent on "the political and judicial institutions of the society"). See also Lee & Meagher, supra note 64, at 161 (reporting survey findings that "formal and informal mechanisms are complements rather than substitutes").
66. See Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597, 615 (1990) (noting that parties may learn "to behave under two sets of rules: a strict set of rules for legal enforcement and a more flexible set of rules for social enforcement"); Stewart Macaulay, Relational Contracts Floating on a Sea of Custom? Thoughts About the Ideas of Ian Macneil and Lisa Bernstein, 94 Nw. U. L. REV. 775, 792 (2000) (discussing Bernstein's suggestion that parties might want to structure a relational deal but still "be able to turn to the written contract and enforce its formal provisions" when the "relationship was no longer valuable or had been damaged beyond repair").
67. See Steven R. Salbu, The Decline of Contract as a Relationship Management Form, 47 RUTGERS L. REV. 1271, 1359 (1995) (reporting that if formal contracts are inappropriate to transactions "some variety or varieties of nonobligational relationship management form may be expected to evolve").
68. See Kathryn Hendley, Peter Murrell & Randi Ryterman, Law Works in Russia: The Role of Law in Interenterprise Transactions, in ASSESSING THE VALUE OF LAW IN TRANSITION ECONOMIES, 56, 82-85 (Peter Murrell ed., 2001). Similarly, a study in the Kyrgyz Republic and Kazhkstan found that "[a]11 legalistic enforcement methods were found to be more effective than the options of stopping trade and reporting problems to other enterprises." Lee & Meagher, supra note 64. at 158.
FOOTNOTE69. NORTH, supra note 14, at 12.
70. Kevin Davis, Michael J. Trebilcock & Bradley Heys, Ethnically Homogenous Commercial Elites in Developing Countries, 32 LAW Bc POL'Y INT'L Bus. 331, 333 (2001). See also OLSON, supra note 30, at 180 (noting how informal markets reduce incidents of breach through such techniques as "making both parts of the transaction simultaneous, by making trades only within families or other close social groups where the aggrieved individual can bring social sanctions to bear, by restricting trades to those who have invested too much to obtain a reputation for honoring deals to profit from failing to do so, and so on"); Nichols, supra note 1, at 273 (suggesting that "[t]he number of contracts that can be created under traditional law is limited"); Ginsburg, supra note 38, at 834 ("[U]nder conditions of weak formal protections, business is conducted within extended family groups, and firms are typically family owned.").
71. Douglass C. North, Institutions, Transaction Costs and Economic Growth, 25 ECON. INQUIRY 419,420 (1987).
72. See, e.g., BUILDING INSTITUTIONS FOR MARKETS, supra note 3, at 174-75 (describing how informal institutions may exclude parties because of linguistic or cultural barriers and how the results of such exclusion may be a growth of inequality, social unrest, and crime).
73. Cheryl W. Gray, Reforming Legal Systems in Developing and Transitional Countries, in MAKING DEVELOPMENT WORK 61, 62 (Ann Seidman et al. eds., 1999). See also Keefer & Knack, supra note 11, at 591 ("[M]ore secure property rights and credible policy regimes increase the incentives of entrepreneurs to adopt those techniques that maximize long-run profits."); Christopher Clague et al., Contract-Intensive Money: Contract Enforcement, Property Rights, and Economic Performance, 4 J. ECON. GROWTH 185, 185-86 (1999) (reporting that "markets in which economic actors make exchanges requiring significant and irreversible commitments in the present" are "less likely to exist when institutions for the protection of property rights and contract enforcement are absent"); Edgardo Buscaglia, Obstacles to Judicial Reform in Latin America, in JUSTICE DELAYED: JUDICIAL REFORM IN LATIN AMERICA 15, 16 (E. Jarquin & F. Carrillo eds., 1998) (reporting the need to rely on "strong legal institutions... as a basis for economic planning").
74. Davis, Trebilcock & Heys, supra note 70, at 332-33. See also Ginsburg, supra note 38, at 835 (noting that reliance on informal mechanisms limits transactions to close-knit groups and "can prevent many potentially beneficial transactions with new businesses or persons with whom the
FOOTNOTEfirm is unfamiliar"); THOMAS W. WALDE & JAMES L. GUNDERSON, Legislative Reform in Transition Economies: Western Transplants: A Short-Cut to Social Market Economy Status, in MAKING DEVELOPMENT WORK, supra note 5, at 71-72 (reporting that "real economic development requires long-term, complex, multiparty investment transactions, and these are not feasible, or are very ineffective and generate high transaction costs if the complex and long-term contractual arrangements constructed are not secured by a strong legal foundation"); Asli Demirguc-Kunt & Vojislav Maksimovic, Law, Finance, and Firm Growth, 53 J. FIN. 2107, 2108 (1998) (suggesting that legal restraints are necessary for the acquisition of long-term financing).
75. See, e.g., Demirguk-Kunt & Maksimovic, supra note 74, at 2134 (1998) (reporting that an "effective legal system is important because a firm that wishes to obtain long-term financing must be able to commit credibly to controlling opportunistic behavior by corporate insiders").
76. See OLSON, supra note 30, at 184-86 (noting transactions that require legal enforcement, including capital contributions to corporations and depositing money in banks).
77. Lee & Meagher, supra note 64, at 133. The authors also found that legal weakness explained the "extremely low level of commercial bank borrowing" in the republics, which "broadly suggests the linkage between weak legal institutions and slow growth, and hence the need for stronger institutions to promote growth"). Id. at 147.
78. See CHRISTOPHER CLAGUE, Institutions and Economic Performance: Property Rights and Contract Enforcement, in INSTITUTIONS AND ECONOMIC DEVELOPMENT, supra note 13, at 69 (reporting that in "societies without well-functioning contract enforcement institutions, individuals and companies" may have to produce their own food rather than relying on market exchange, manufacture their own products and maintain large stocks of inventories of replacement parts).
79. NORTH, supra note 14, at 35 (noting that we "cannot have the productivity of a modem high income society with political anarchy").
80. See also PAUL H. RUBIN, Legal Reform in Eastern Europe, in 2 THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW, supra note 58, at 554 (reporting that "[e]fficient contract law would limit the possibility for private opportunism").
FOOTNOTE81. See ALAN SCHwARTZ, Incomplete Contracts, in 2 THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW, supra note 58, at 279 (discussing the theoretical transaction cost efficiency benefits of the creation of such default rules); Ugo Mattei, Efficiency and Equal Protection in the New European Contract Law: Mandatory, Default and Enforcement Rules, 39 VA. J. INT'L L. 537, 538 (1999) (reporting that default rules can "enhance efficiency by reducing transaction costs produced by time and energy-consuming negotiations").
82. See RICHARD A. EPSTEIN, PRINCIPLES FOR A FREE SOCIETY 35 (1998) (reporting that custom finds it "difficult to adapt sensibly to rapid discontinuities in traditional business or legal environments").
83. NORTH, supra note 17, at 167. 84. Id. at 37.
85. ELLICKSON, supra note 43, at 284 (detailing how legal rules can influence and promote informed cooperation).
FOOTNOTE86. See Ginsburg, supra note 38, at 841 (reporting that the "ADB study effectively undercuts that thesis by noting that the substitutes are themselves dependent on legal norms").
87. Raja Kali, Business Networks in Transition Economies: Norms, Contracts, and Legal Institutions, in ASSESSING THE VALUE OF LAW IN TRANSITION ECONOMIES, supra note 68, at 212. See also id. at 218 (reporting a number of theoretical papers that suggest that "the partial equilibrium result-of informal contract enforcement institutions enhancing economic efficiencyis not robust to a general equilibrium extension, one that takes into account the effect of network structures on the economy as a whole").
88. Mattei, supra note 81, at 538. See also Chang Ju Choi et al., A Note on Countertrade, Contractual Uncertainty and Transaction Governance in Emerging Economies, 30 J. INT'L Bus. STUD. 189 (1999) (reporting that the "gains from trade ... require legal and governmental institutions that guarantee individual rights to impartial enforcement of contract and property") (quoting M. Olson, The Hidden Path To A Successful Economy, in THE EMERGENCE OF MARKET ECONOMIES IN EASTERN EUROPE (C. Clague & C. Rosier eds., 1992)).
FOOTNOTE89. See infra Part II.
90. The "more close-knit a group, the more successful it will be at generating and enforcing utilitarian norms to govern internal disputes." ELLICKSON, supra note 43, at 250.
91. Posner, supra note 38, at 3.
92. ELLICKSON, supra note 43, at 249. 93. Id. at 250.
94. Id. at 253 (showing informed controls leading to feuds).
95. Curtis J. Milhaupt & Mark D. West, The Dark Side of Private Ordering: An Institutional and Empirical Analysis of Organized Crime, 67 U. CHI. L. REV. 41, 44 (2000).
96. Posner, supra note 38, at 3. See also Ellen D. Katz, Private Order and Public Institutions, 98 MICH. L. REv. 2481, 2481 (2000) (discussing the "reliance of some private-order institutions on practices of exclusion, collusion, and physical violence").
97. Kahkonen & Meagher, supra note 49, at 11.
FOOTNOTE98. Daniel McGrory, Civilizing the Russian Underground Economy: Requirements and Prospects for Establishing a Civil Economy in Russia, 5 TRANSNAT'L L. & CONTEMP. PROBS. 65, 74 (1995).
FOOTNOTE99. Frye, supra note 40, at 133.
100. See, e.g., Rubin, supra note 80, at 556-57. Rubin notes that organized crime may also be invoked to intimidate creditors and prevent the enforcement of agreements. The need to resist organized crime has forced Russian banks to protect themselves, so that "one-third of bank employees are security guards." Id. at 556. Moreover, the short time horizon of mafiosi makes them unreliable agents-they may simply recover due payments on a contract and just keep the money for themselves. Such criminalization may be "destroying the Russian economy." Id. at 557.
101. McGrory, supra note 98, at 77. Mafia-like enforcers may intimidate competitors from entering markets, create the functional equivalent of fixed prices, and discourage outside investors. Id. at 76.
FOOTNOTE102. See Kahkonen & Meagher, supra note 49, at 19.
103. Luis Pasara, Judicial Reform and Civil Society, in JUSTICE DELAYED: JUDICIAL REFORM IN LATIN AMERICA, supra note 73, at 83, 85.
104. See Gilliam Tett, Gangsters Who Hold Japan's Future to Ransom, FIN. TIMES, Oct. 15, 2001, at 21 (reporting that because the "Japanese state has not been very effective at creating clearcut rules for business," the country has relied on the yakuza to fill the vacuum). She observed that Japan has four times as many yakuza as licensed attorneys. Id.
105. THOMAS SCHELLNG, CHOICE AND CONSEQUENCE 168 (1984). 106. Milhaupt & West, supra note 95, at 41.
107. Id. at 84.
108. See Frank B. Cross, The First Thing We Do, Let's Kill All the Economists: An Empirical Evaluation of the Effect of Lawyers on the United States Economy and Political System, 70 TExAs L. REV. 645, 680 (1992).
FOOTNOTE109. See Mark D. West, Information, Institutions, and Extortion in Japan and the United States: Making Sense of Sokaiya Racketeers, 93 Nw. U. L. REv. 767 (1999). Blackmail payments to the sokaiya a similar economic role to that of shareholder civil actions in the United States. See id. at 791-92.
110. Tett, supra note 104.
111. See Milhaupt & West, supra note 95, at 45.
112. See West, supra note 109, at 796-97 (describing the practice in Italy and South Korea). 113. See, e.g., Ginsburg, supra note 38, at 834 (reporting that "some have asserted that theories based on the experience of Western countries may be inapplicable to societies with very different cultural traditions").
114. See, e.g., G.L. Hicks & S.G. Redding, The Story of the East Asian "Economic Miracle", 2 EURO-ASIA Bus. REV. 18.
115. See Richard Bilder & Brian Z. Tamanaha, Book Review and Note, 89 AM. J. INT'L L. 470, 473-76 (1995); Amy L. Chua, Markets, Democracy, and Ethnicity, 108 YALE L.J. 1, 12-13 (1998) (reviewing this history).
FOOTNOTE116. See David Trubek & Marc Galanter, Scholars in Self-Estrangement: Some Reflections on the Crisis in Law and Development Studies in the United States, 1974 WIS. L. REV. 1062.
117. Bilder & Tramanaha, supra note 115, at 484.
118. See, e.g., JAMES A. GARDNER, LEGAL IMPERIALISM: AMERICAN LAWYERS AND FOREIGN AID IN LATIN AMERICA 6 (1980) (characterizing "American legal models" as "vulnerable to authoritarian abuse"); Lan Cao, Law and Economic Development: A New Beginning?, 32 TEx. INT'L L.J. 545, 550 (1997) (noting that the movement was criticized for "ethnocentrism, myopia and naivete"); Jane Kaufman Winn, How to Make Poor Countries Rich and How to Enrich Our Poor, 77 IOWA L. REV. 899, 922 (1992) (suggesting that past law and development efforts failed because the U.S. institutions were resisted by local cultures).
119. ELLICKSON, supra note 43, at 147.
120. See Chua, supra note 115, at 13 (describing the death of the movement); Cao, supra note 118, at 545 (noting that law and development "was declared dead by its proponents in the late 1970s"); Ginsburg, supra note 38, at 829 (observing that the "Law and Development Movement ultimately fizzled").
121. Amy L. Chua, The Paradox of Free Market Democracy: Rethinking Development Policy, 41 HARV. INT'L L.J. 287, 290 (2000).
122. Id. at 346-47.
123. See, e.g., Spencer Weber Waller & Lan Cao, Law Reform in Vietnam: The Uneven Legacy of Doi Moi, 29 N.Y.U. J. INT'L L. & POL. 555, 558-59 (1997) (reporting that an "additional risk associated with the law reform business is that Western-style business law may be inappropriate for the receiving country").
FOOTNOTE124. See, e.g., OLSON, supra note 30, at 173 (noting the ubiquity of markets in poor economies); id. at 174 (noting how such markets spontaneously arise); id. at 180 (noting that markets arise even when "trade is illegal"); Clague et al., supra note 73, at 185 (observing that markets are "commonplace in all types of societies, including the poorest, and they exist even in remarkably unfavorable conditions").
125. See OLSON, supra note 30, at 174 (observing that "some types of markets regularly emerge whether or not the participants have anything in common, and sometimes even when participants have antipathy toward one another").
126. Trebilcock, supra note 9, at 42.
127. See, e.g., McGrory, supra note 98, at 66-70 (discussing concepts of underground and informal economies in context of Soviet-era and modern-day Russia).
128. DESOTO, supra note 31, at 69. 129. Id. at 69-70.
130. 0. Lee Reed, Law, the Rule of Law, and Property: A Foundation for the Private Market and Business Study, 38 AM. Bus. L.J. 441, 454 (2001).
FOOTNOTE131. DE SOTO, supra note 31, at 84-85. 132. McGrory, supra note 98, at 69.
FOOTNOTE133. Actually, some have sought to argue that what we call corruption is a cultural artifact, explained by gift-giving cultural conventions. See Nii Lante Wallace-Bruce, Corruption and Competitiveness in Global Business-The Dawn of a New Era, 24 MELB. U. L. REV. 349, 351 (2000) (reporting the "view in certain quarters that corruption has its roots deeply embedded in cultures"). However, this view has been "dismissed as a myth," as every major religion or school of thought condemns the practice. Id. at 352. See also Padideh Ala'I, The Legacy of Geographical Morality and Colonialism: A Historical Assessment of the Current Crusade Against Corruption, 33 VAND. J. TRANSNAT'L L. 877, 904-05 (2000) (discrediting claims that gift-giving or other cultural attributes validate corruption). In addition, it appears that corruption is explained by traditional economic factors. See J.S. Nye, Corruption and Political Development: A Cost-Benefit Analysis, 61 AM. POL. So. REV. 417 (1967) (explaining how corruption was a response to economic circumstances and could be beneficial); Paul B. Stephan, Rationality and Corruption in the PostSocialist World, 14 CONN. J. INT'L L. 533, 533 (1999) (reporting that in "many places and in many instances, corruption represents a successful adaptation to the world in which people find themselves").
134. See generally THOMAS SOWELL, MIGRATIONS AND CULTURES: A WORLD VIEW (1996); LAWRENCE E. HARRISON, WHO PROSPERS? How CULTURAL VALUES SHAPE ECONOMIC AND POLITICAL SUCCESS (1992).
135. See Davis et al., supra note 70, at 340 (noting reports that native Fijians "are accustomed to a subsistence lifestyle" and that Sub-Saharan African entrepreneurs suffer from an absence of trust and "a predilection for engaging in conspicuous consumption rather than reinvesting profits in their businesses").
FOOTNOTE136. Peter H. Schuck, Perpetual Motion, 95 MICH. L. REV. 1738, 1745 (1997).
137. See ELLICKSON, supra note 43, at 154 (reporting tendency among sociologists to treat social norms as if they were "exogenous givens").
138. See, e.g., AMARTYA SEN, DEVELOPMENT AS FREEDOM 243 (1999) (addressing how the "image of regional self-sufficiency in cultural matters is deeply misleading" and how many "national traditions" in fact bear the imprint of past outside influences).
139. Sowell, for example, suggests that a group's culture may be a rational response to their geographic circumstances. See Schuck, supra note 136, at 1747 (stating that Sowell "emphasizes the value-shaping role of soil, climate, topography, and water supply, and the rational, functional adaptations of people to these geographical factors as they develop their occupational patterns and social mores").
140. Certain ethnic immigrant minorities may succeed in countries with poor legal institutions, because of their ethnically-based trading networks, that require little legal enforcement and thus cause them to "incur lower contracting costs" than other groups. Davis, Trebilcock & Heys, supra note 70, at 347. If this is the case, improving legal institutions would simply extend those benefits to other groups and have a positive economic effect.
141. La Porta et al., supra note 29, at 230.
142. Margaret Jane Radin, Compensation and Commensurability, 43 DUKE L.J. 56, 83 (1993). 143. See LON L. FULLER, THE PRINCIPLES OF SOCIAL ORDER 231-32 (Kenneth I. Winston ed., 1981) (arguing that the origins of the law against murder served to order and facilitate human interaction).
144. See Russell Hardin, Law and Social Norms in the Large, 86 VA. L. REV. 1821, 1834 (2000).
FOOTNOTE145. See Ariela Gross, Beyond Black and White: Cultural Approaches to Race and Slavery, 101 COLUM. L. REV. 640, 688-89 (2001) (discussing the intersection of law and culture in the context of race relations in the South).
146. See, e.g., David S. Landes, Why Are We So Rich and They So Poor?, 80 AM. ECON. REV. PAPERS AND PRoc. 1, 11 (1990) (observing that "values" are a problem for developers, because they "tend to be reinforced by economic failure").
FOOTNOTE147. DE SOTO, supra note 31, at 239-40. 148. Id at 240.
149. See LAL, supra note 8, at 14 (discussing research in FREDRIC L. PRYOR, THE ORIGINS OF THE ECONOMY: A COMPARATIVE STUDY OF DISTRIBUTION IN PRIMITIVE AND PEASANT ECONOMIES (1977)).
150. See id.
151. ROBERT O. COOTER, DO GOOD LAWS MAKE GOOD CmzENs? AN ECONOMIC ANALYSIS OF INTERNALING LEGAL VALUES (U.C. Berkeley Law & Econ., Working Paper Series No. 20008,2000).
152. Id. at 11. 153. Id at 18. 154. Id at 20. 155. Id. at 23.
FOOTNOTE156. Besley, supra note 18, at 904.
157. Id. at 906 (reporting that Africans have planted additional trees on their land in an effort to lay individual claim to the land itself).
158. Id. at 904 (observing that the communal land tenure systems in Ghana "have gradually been supplanted by individualistic property rights").
159. See Adebayo Adedeji, An Alternative for Africa, in ECONOMIC REFORM AND DEMOCRACY 127, 129 (Larry Diamond & Marc F. Plattner eds., 1995) (urging that a "legal system that fully and fairly enforces such standards is obviously essential").
160. Chua, supra note 121, at 342. 161. LAL, supra note 8, at 139.
162. See Minxin Pei, The Puzzle of East Asian Exceptionalism, in ECONOMIC REFORM AND DEMOCRACY, supra note 159, at 116 (noting that the "pace, depth, and viability of economic reform vary enormously across the region").
163. See LAL, supra note 8, at 138 (observing that "social rates of return improved in the early part of the period, when Korean policy moved toward openness, and fell (from 31 percent to 19 percent) in the second half (1974-1979), when dirigiste policies were adopted").
164. See KATHARINA PISTOR & PHILIP A. WELLONS, THE ROLE OF LAW AND LEGAL INSTITUTIONS IN ASIAN ECONOMIC DEVELOPMENT, 1960-1995, 21 (1999) (discussing these hypotheses).
165. See id. at 278 fig.8.1 (showing that the legal systems generally had moved from traditional state-based discretionary structures to Western-style rule-based market systems during the time
FOOTNOTEperiod). Though some differences remain, "Asia's growth experience largely resembles the different paths of economic and institutional change taken historically in the West." Id. at 286.
166. See id. at I (reporting that "[law played an important role in Asia's remarkable economic growth during the second half of the twentieth century").
167. See, e.g., W. Easterly & R. Levine, Africa's Growth Tragedy: Policies and Ethnic Divisions, 112 Q.J. ECON. 1203 (1997).
168. Englebert, supra note 29, at 9.
169. See id. at 21 tbl.2 (considering such other factors as colonialism by Britain, France, Belgium, and Portugal as well as civil wars, multiplicity of languages, etc.).
170. See id. at 24 tbl.3. 171. Id. at 18.
172. See, e.g., La Porta et al., supra note 29, at 245 (finding that the negative effect became insignificant once authors controlled for per capita income and latitude).
173. See, e.g., THE WORLD BANK, ENHANCING WOMEN'S PARTICIPATION IN ECONOMIC DEVELOPMENT 25 (1994) (discussing substantial economic benefits to educating women and how their labor market participation "increases economic efficiency").
FOOTNOTE174. See Nicholas D. Kristof, The Veiled Resources, N.Y. TIMEs, Dec. 11, 2001, at A27 (reporting that "[h]istory has repeatedly shown the economic advantages of education and autonomy for women, and indeed the West pulled ahead of the rest of the world beginning in the 1400s partly because it was educating more girls").
175. See infra note 177.
176. See Christopher D. Carroll, Byung-Kun Rhee & Changyong Rhee, Are There Cultural Effects on Saving? Some Cross-Sectional Evidence, 1999 Q.J. ECON. 685, 685 (finding no evidence of cultural effects on saving).
177. See DE SOTO, supra note 31, at 240 (reporting that "Vietnamese, Cuban and Indian migrants have clearly had few problems adapting to U.S. property law").
178. Jo R=IN, WILLIAM EASTERLY BL MICHAEL WOOLCOCK, ON "GOOD" POLITICIANS AND "BAD" POLICIES: SOCIAL COHESION, INSTITUTIONS, AND WORLD GROWTH 25 (World Bank Policy Research, Working Paper No. 2448, 2000).
179. Id.
FOOTNOTE180. See WILLIAM EASTERLY, CAN INSTITUTIONS RESOLVE ETHNIC CONFLICT? (World Bank Policy Research, Working Paper No. 2482, 2000). The lessened trust among different ethnic groups undermines the social cohesion necessary for informal legal substitutes. Id. at 6. Moreover, "[g]ood institutions may thus mitigate ethnically-based social conflict that lowers growth." Id. at 8. Using measures of ethnolinguistic fractionalization and ICRG scores for rule of law and related variables, the study concluded that "sound institutional arrangements mitigate the negative effects of ethnic diversity" and that "ethnic diversity has zero marginal effect on economic growth at maximum institutional development." Id. at 9.
FOOTNOTE181. Thorsten Beck et al., Law, Politics, and Finance 18-20 (Oct. 2001) (unpublished manuscript, on file with the Texas Law Review).
182. See Craig Burnside & David Dollar, Aid, Policies, and Growth, 90 AM. ECON. REV. 847, 856 tbl.4 (2000).
183. See Oliver Dieckmann, Cultural Determinants of Economic Growth: Theory and Evidence, 20 J. CULTURAL ECON. 297, 316 (1996) (concluding that "economic growth experiences are culturally bounded").
184. Id. at 305-06. The underlying research can be found in GEERT HOFSTEDE, CULTURE'S CONSEQUENCES: INTERNATIONAL DIFFERENCES IN WORK-RELATED VALUES 11 (1980).
185. Dieckmann, supra note 183, at 318 n.18 (reporting a negative correlation between uncertainty avoidance and economic growth between 1925-1950).
186. Paul F. Whitely, Economic Growth and Social Capital, 48 POL. STUD. 443 (2000). A separate study of African nations, though, found no independent effect of social capital. See Englebert, supra note 29, at 25 (reporting that "social capital fails the test of accounting for variations in performance across countries").
187. For a discussion and study of the forces contributing to social capital and its positive effect on economic growth, see Stephen Knack & Philip Keefer, Does Social Capital Have an Economic Payoff? A Cross-Country Investigation, Q.J. ECON. 1251 (1997).
188. Whitely, supra note 186, at 456. 189. Id.
FOOTNOTE190. While some attribute economic consequences to faith, such as Islam, researchers have suggested that "given the protean nature of Islamic economic precepts, Muslims have been able to pick and choose between them, and so Islam is irrelevant in explaining the fluctuating economic fortunes of Muslim societies." LAL, supra note 8, at 56. Economic successes in a number of Islamic nations "show that it is not Islamic beliefs in themselves that have hindered development but dysfunctional etatism and dirigisme." Id. at 66.
191. Id.
192. See Burton A. Abrams & Kenneth A. Lewis, Cultural and Institutional Determinants of Economic Growth: A Cross-Section Analysis, 83 PUB. CHOICE 273 (1995).
193. See Joel P. Trachtman, The Applicability of Law and Economics to Law and Development: The Case of Financial Law, in MAKING DEVELOPMENT WORK, supra note 5, at 193, 204 (suggesting that principles of law and economics succeed "not by ignoring local differences, but by evaluating local rules against potential substitutes so as to determine which structure is more efficient to achieve local preferences").
194. A middle ground is suggested by Nichols, supra note 1. Nichols suggests that formal contracting institutions need to be introduced into poorer nations but that this introduction will be affected by local cultural factors and not result in institutional practices that are "coincident with that of the West." Id. at 296.
195. See, e.g., Chua, supra note 121, at 301 (conceding that cultural explanation often suffers from "ad hoc residualism and non-falsifiability").
196. NORTH, supra note 14, at 140. See also Andrzej Rapaczynski, The Roles of the State and the Market in Establishing Property Rights, J. ECON. PERSP., Spring 1996, at 87, 88-89 (1996) (discussing how a legal system cannot enforce all property rights disputes and requires selfenforcing mechanisms as well).
197. See KNIEPER AND BOGUSLAVSKI, supra note 5, at 123 (asserting that a nation's historic features should be taken into account but that universal principles of commercial law are not altered by that history). The necessary adaptation may have less to do with "culture" as it is commonly conceived than with the legacy of political and economic structures of the nation in question. See, e.g., id. at 118-20 (reporting that efforts to reform post-communist nations suffered for the failure to take into account their historic political and judicial structures).
FOOTNOTE198. See Brian Tamanaha, A Pragmatic Approach to Legislative Theory for Developing Countries, in MAKING DEVELOPMENT WORK, supra note 5, at 156 (reporting on the Micronesian experience that legal transplants "seldom work in precisely the same way in the transplanted milieu as they did in their place of origin," but that "does not mean they do not work at all," so that transplantation may be the "most efficient" source of legal development).
199. Joel P. Trachtman, The Applicability of Law and Economics to Law and Development, in MAKING DEVELOPMENT WORK, supra note 5, at 196. Like so many debates, the significance of law and economics is too often cast as a Manichean debate between those who view it as a cure-all and those who dismiss it as worthless. See id. (suggesting reliance on "principles of law and economics").
FOOTNOTE200. A common tool used for quantitative measures of democracy is that of Freedom House, which considers such variables. See RAYMOND D. GASTIL, FREEDOM IN THE WORLD: POLITICAL RIGHTS AND CIVIL LIBERTIES 1978 (1978). These are sometimes referred to as "the Gastil estimates," after their author. An alternative is known as the Polity data set. See KEITH JAGGERS & TED ROBERT GURR, POLITY III: REGIME TYPE AND POLITICAL AUTHORITY, 1800-1994 (InterUniversity Consortium for Political and Social Research, Study No. 6695, 1996).
201. See Jack Donnelly, Human Rights, Democracy, and Development, 21 HUM. RTS. Q. 608 (1999) (suggesting that democracy can restrict predatory misrule).
202. See OLSON, supra note 30, at 18-19 (suggesting that democratic governance provides a greater incentive to expand the overall supply of public goods); David A. Lake & Matthew A. Baum, The Invisible Hand of Democracy: Political Control and the Provision of Public Services, 34 COMP. POL. STUD. 587 (2001) (reporting evidence that competitive political markets promote efficiency in the provision of public goods and services).
203. See, e.g., Pranab Bardhan, Symposium on Democracy and Development, J. ECON. PERSP., Summer 1993, at 45, 45 (noting that democracies "may actually be more susceptible to pressures for immediate consumption and other particularistic demands that may hamper long-run investment"); J. Benson Durham, Economic Growth and Political Regimes, 4 J. ECON. GROwTH 81, 82 (1999) (noting the argument that a dictatorship may "more effectively stimulate growth and investment by suppressing labor unions, wages, and consumer demand-very unpopular measures").
204. Adam Przeworski & Fernando Limongi, Political Regimes and Economic Growth, J. ECON. PERSP., Summer 1993, at 51, 61 (summarizing results of the eighteen studies).
FOOTNOTE205. One study has suggested that democracy and economic growth may be positively related at low levels of political freedom but negatively related at higher levels. Robert J. Barro, Democracy and Growth, 1 J. ECON. GROWTH 1 (1996).
206. See Ross E. Burkhart, Economic Freedom and Democracy: Post-Cold War Tests, 37 EUR. J. POL. RES. 237 (2000) (reviewing literature that suggests that capitalism promotes democratic development); Cao, supra note 118, at 558 (noting that experience indicates that "political liberalization may indeed follow upon the heels (though not always immediately) of economic development").
207. Jenny A. Minier, Democracy and Growth: Alternative Approaches, 3 J. ECON. GROWTH 241 (1998).
FOOTNOTE208. Id. at 247. In addition, the upheaval associated with a shift to democracy may cause a "temporary worsening of property rights." Christopher Clague, Democracy, Autocracy, and the Institutions Supportive of Economic Growth, in INSTITUTIONS AND ECONOMIC DEVELOPMENT, supra note 13, at 108.
209. See id. at 253 (observing that the "countries that democratized were predicted to grow more slowly than their control groups; in fact they tended to grow faster").
210. See id. at 260-61 tbls.7, 8. 211. See id. at 261-62.
212. See Christopher Clague et al., Property and Contract Rights in Autocracies and Democracies, 1 J. ECON. GROWTH 243 (1996). Rather than testing the indirect association between democracy and growth, this study tested the relationship between democracy and the intermediate variables of property rights and contract enforcement. It found that democracies consistently outperformed autocracies in protecting these rights. Id. at 258.
FOOTNOTE213. See Steve H. Hanke & Stephen J.K. Walters, Economic Freedom, Prosperity, and Equality: A Survey, 17 CATO J. 117 (1997) (reporting general agreement upon these elements of economic freedom).
214. One of the first indices was published in DANIEL J. SLOTTJE ET AL., MEASURING THE QUALITY OF LIFE ACROSS COUNTRIES 206-60 (1991). The Fraser Institute in Canada has created a similar measure. See RATING GLOBAL ECONOMIC FREEDOM (Stephen T. Easton & Michael A. Walker eds., 1992). The Heritage Foundation has a somewhat different index for economic freedom. See BRYAN T. JOHNSON & THOMAS P. SHEEHY, 1996 INDEX OF ECONOMIC FREEDOM 26-37 (1996) [hereinafter INDEX OF FREEDOM (1996)] (describing the components of its index). And Freedom House has its own separate and very distinct measures. RICHARD E. MESSICK, WORLD SURVEY OF ECONOMIC FREEDOM 1995-1996 (1996). These last three indices are reviewed and compared in Hanke & Walters, supra note 213, at 124-32.
215. For example, indices may include factors such as total government spending and national price stability. See JAMES D. GWARTNEY ET AL., ECONOMIC FREEDOM OF THE WORLD, 19751995, at 7 (1996). The Heritage Foundation index includes monetary policy, but also breaks down the components with separate ratings for property rights. See INDEX OF FREEDOM (1996), supra note 214, at 26-37 (summarizing these elements). The Freedom House index is focused on the law but also incorporates more general liberties, such as freedom of speech. See WORLD SURVEY OF ECONOMIC FREEDOM 1995-1996, supra note 214, at 5-8.
216. See, e.g., Keefer & Knack, supra note 11, at 592-93 (noting the two main services, the International Country Risk Guide (ICRG) and Business Environmental Risk Intelligence (BERI)). These measures have the merit of passing the market test-businesses pay to subscribe to the services and obtain the information. See DANIEL KAUFMANN, AART KRAAY & PABLO ZOIDOLOBATON, GOVERNANCE MATTERS 5 (World Bank Policy Research, Working Paper No. 2196, 1999) (arguing "the fact that commercial rating organizations are able to consistently sell their assessments to commercial subscribers for considerable fees is convincing evidence that these sources are in fact producing useful information").
217. See Clague et al., supra note 73, at 185 (describing the concept as "the ratio of noncurrency money to the total money supply, or (M2-C)/Mx, where M2 is a broad definition of the money supply and C is currency held in outside banks" and using it in research).
FOOTNOTE218. GWARTNEY, supra note 215, at xvii. See also id. at 89-110 (comparing the levels of economic freedom and economic growth with descriptive general statistics); Kim R. Holmes & Melanie Kirkpatrick, Freedom and Growth, WALL ST. J., Dec. 16, 1996, at A16 (summarizing results of Heritage Foundation study).
219. Leschke, supra note 4, at 277.
220. See Johan Torstensson, Property Rights and Economic Growth: An Empirical Study, 47 KYKLOS 231, 242 (1994) (concluding that "arbitrary seizures of property decelerate economic growth"); Baizhu Chen & Yi Feng, Some Political Determinants of Economic Growth: Theory and Empirical Implications, 12 EUR. J. POL. ECON. 609 (1996) (noting that, along with regime change and political assassination, "lack of economic freedom or a sound business milieu all lead to a decrease in economic growth").
221. See Clague et al., supra note 73, at 205-07.
222. See Keefer & Knack, supra note 11, at 599-600 (analyzing the possibility that reverse causality explained their results and rejecting it, because of the timing of the independent and dependent variables); Christopher Clague, Institutions and Economic Performance: Property Rights and Contract Performance, in INSTITUTIONS AND ECONOMIC DEVELOPMENT, supra note 13, at 7980 (noting that the relationship is strong when the economic freedom numbers (independent variable) predate the growth results (dependent variable)).
223. This institutional setting may be much more important than the substantive component of the laws themselves, which may be ineffective absent a functioning rule of law. Private parties may be able to contract around inefficient rules, but it is "much harder to compensate for the systemic failures of the legal system." Demirguk-Kunt & Maksimovic, supra note 74, at 2114.
224. See Beatrice Weder, Legal Systems and Economic Performance: The Empirical Evidence, in JUDICIAL REFORM IN LATIN AMERICA AND THE CARIBBEAN 23-24 (describing questionnaire).
FOOTNOTE225. See Aymo Brunetti et al., Credibility of Rules and Economic Growth: Evidence from a Worldwide Survey of the Private Sector, WORLD BANK ECON. REV. 25, 26 tbl.7 (1997), available at http://www.unibas.ch/wwz/wiforlstaff/bw/survey/wberdef.pdf.
226. BUILDING INSTITUTIONS FOR MARKETS, supra note 3, at 119 (reporting an international study finding that "newly created private enterprises, which do not have established supplier and customer networks or significant market power, are most likely to resort to the use of commercial courts").
227. See William C. Whitford, The Rule of Law, 2000 WIS. L. REV. 723, 728 (declaring that judicial independence was "widely seen as critically necessary to the effective implementation" of a rule of law).
228. See infra notes 243-250 and accompanying text.
229. Joel P. Trachtman, The Applicability of Law and Economics to Law and Development: The Case of Financial Law, in MAKING DEVELOPMENT WORK, supra note 5, at 204.
230. See, e.g., Ross Levine & Sara Zervos, Stock Markets, Banks, and Economic Growth, 88 AM. ECON. REV. 537 (1998) (reporting that strength of stock markets and commercial banks
FOOTNOTEpromote economic growth); Raymond Atje & Boyan Jovanovic, Stock Markets and Development, 37 EUR. ECON. REv. 632 (1993) (reporting association between economic growth and stock market liquidity).
FOOTNOTE231. See, e.g., Stephen Choi, Regulating Investors Not Issuers: A Market-Based Proposal, 88 CAL. L. REV. 279 (2000) (contending that regulation of issuers is unnecessary); Paul Mahoney, The Exchange as Regulator, 83 VA. L. REV. 1453 (1997) (arguing that enforcement should be shifted from government to private stock exchanges).
232. Bernard Black has comprehensively reviewed the importance of securities regulation and emphasized that it enables companies to convey credible information to third parties, thereby enhancing the securities market. See Bernard S. Black, The Legal and Institutional Preconditions for Strong Securities Markets, 48 UCLA L. REV. 781 (2001). Researchers at the National Bureau of Economic Research have published a series of studies showing that legal investor protections foster growth. See, e.g., Rafael La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997).
FOOTNOTE233. See LAURA N. BENY, A COMPARATIVE EMPIRICAL INVESTIGATION OF AGENCY AND MARKET THEORIES OF INSIDER TRADING 6 (Harvard Law Sch. Discussion Paper No. 264, 1999) (reporting that regimes with weaker insider trading prohibitions "have, on average, less liquid equity markets"); Utpal Bhattacharya & Hazen Daouk, The World Price of Insider Trading 57 J. FIN. 75 (2002) (reporting that countries with insider trading laws and prosecutions had a lower overall cost of equity); Robert Prentice, Whither Securities Regulation? Some Behavioral Observations Regarding Proposals for its Future, 51 DUKE L.J. 1397 (forthcoming Mar. 2002) (reviewing evidence on value of securities fraud regulation).
234. BUILDING INSTITUTIONS FOR MARKETS, supra note 3, at 80. The study included such requirements as an audit by certified external auditors. Id.
235. Id. at 141 (describing benefits of such competition laws). 236. RODRICK, supra note 6, at 7.
FOOTNOTE237. LON L. FuLLER, THE MORALITY OF LAw 28 (rev. ed. 1969).
238. This is the classical economic wisdom. See, e.g., DANIELS. HAMERMESH, LABOR DEMAND 273 (1993) (noting that a common explanation for slower employment growth in some areas of North America is difficulty in firing workers). There is some empirical research supporting this position. See Edward P. Lazear, Job Security Provisions and Employment, 105 Q.J. ECON. 699 (1990) (suggesting that "severance pay requirements reduce employment").
239. See, e.g., Besley, supra note 18, at 904-07 (noting that in Ghana there was relatively little threat of expropriation but that the value of recognition of property rights was reduced by restrictions on the rights of transfer, bequeath, and collateralization).
FOOTNOTE240. See DE SOTO, supra note 31, at 110-27. 241. Id. at 177.
242. BUILDING INSTITUTIONS FOR MARKETS, supra note 3, at 36 (discussing evidence of positive effects in Thailand and Brazil but lesser success in other very poor regions of the world). 243. Luis Pasara, Judicial Reform and Civil Society, in JUSTICE DELAYED: JUDICIAL REFORM IN LATIN AMERICA, supra note 73, at 87.
244. Edgardo Buscaglia, Introduction to THE LAW AND ECONOMICS OF DEVELOPMENT, supra note 9, at 3.
245. See, e.g., PISTOR & WELLONS, supra note 164, at 10 (reporting that a "relatively high level of state involvement was compatible with, and perhaps even conductive to, economic growth").
246. See Ginsburg, supra note 38, at 839 (reporting that by the mid-1980s, these nations "shifted to more market-oriented solutions" and had an "increased recourse to formal law" and associated increase in litigation in all the East Asian nations other than Japan).
FOOTNOTE247. William Riker, Comments on Vincent Ostrom's Paper, 27 PUB. CHOICE 13, 13 (1976). 248. See Xavier de Vanssay & Z.A. Spindler, Freedom and Growth: Do Constitutions Matter?,
78 PUB. CHOICE 359 (1994) (reporting that the constitutional entrenchment of rights had no apparent effect on growth); Joel S. Hellman, Constitutions and Economic Reform in the PostCommunist Transitions, in THE RULE OF LAW AND ECONOMIC REFORM IN RUSSIA, supra note 40, at 55 (reporting that the establishment of a constitution had at best marginal value in promoting economic reform in Eastern European nations).
249. See writings of John Elster, Rusdsell Hardin, Douglass North, and Barry Weingast.
250. ZANE A. SPINDLER & XAVIER DE VANSSAY, CONSTITUTIONAL DESIGN AND ECONOMIC FREEDOM 9-10, 16-17 (Indep. Inst., Working Paper No. 24, 2001).
251. Critics have claimed that "current legal arrangements led to major detrimental effects on the U.S. economy," such as "limitations on the availability of products, increases in product prices, and discouragement of innovation." Steven Garber, Tort Liability and Economic Performance: Research Challenges, in JUDICIAL REFORM IN LATIN AMERICA AND THE CARIBBEAN, supra note 224, at 27.
FOOTNOTE252. See Frank B. Cross, Lawyers, the Economy, and Society, 35 AM. BUS. L.J. 477, 504-08 (1998).
253. For a review of some of the valuable services that lawyers provide business, see Charles Silver & Frank B. Cross, What's Not To Like About Being a Lawyer?, 109 YALE LJ 1468-69 (2000).
FOOTNOTE254. DE SOTO, supra note 31, at 209.
255. Douglas Webb, Legal System Reform and Private Sector Development in Developing Countries, in Making Development Work, supra note 5, at 33, 38.
256. See, e.g., STEPHEN P. MAGEE ET AL., BLACK HOLE TARIFFS AND ENDOGENOUS POLICY THEORY 119 (1989) (reporting an empirical test indicating the negative effect of lawyer numbers); Kevin M. Murphy et al., The Allocation of Talent: Implications for Growth, 106 Q.J. ECON. 503, 524 (1991) (reporting that a 10% increase in law school enrollment caused a 0.33% decline in economic growth).
257. See Frank B. Cross, The First Thing We Do, Let's Kill All the Economists: An Empirical Evaluation of the Effect of Lawyers on the United States Economy and Political System, 70 TEXAS L. REV. 645, 672-76 (1992) (reporting evidence failing to conclusively demonstrate negative economic effect to lawyer numbers); Charles R. Epp, Do Lawyers Impair Economic Growth?, 17 L. & SOC. INQUIRY 585 (1992) (reviewing and reanalyzing Magee's data and finding no negative effect to lawyering).
258. See Walde & Gunderson, at 80 n.80 (reporting that the "emphasis on legal culture-the specific habits, procedures, attitudes, induction and community rituals and communication media of the professional community of the lawyers-seems to be a condition for the mergence of at least a Western system of market economy law").
AUTHOR_AFFILIATIONFrank B. Cross*
AUTHOR_AFFILIATIONHerbert D. Kelleher Centennial Professor of Business Law, McCombs School of Business; Professor of Law, University of Texas School of Law.
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