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Law and Development

An Institutional Critique

Frank H. Stephen

This book draws on the analytical framework of New Institutional Economics (NIE) to critically examine the role which law and the legal system play in economic development. Analytical concepts from NIE are used to assess policies which have been supported by multilateral development organisations including securing private property rights, reform of the legal system and financial development. The importance of culture in shaping the legal environment, which in turn influences financial sector development, is also assessed using Oliver Williamson’s ‘levels of social analysis’ framework.
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Chapter 4: A New Institutional Economics approach to Law and Development

An Institutional Critique

Frank H. Stephen

Extract

Chapter 4 begins with two issues relating to property rights. Hernando de Soto’s ‘collateral effect’ is outlined and evaluated. It is concluded that there is only limited empirical support for the effect’s existence. Second, it is argued that the term called ‘property rights’ as used in cross-country studies of development does not measure property rights per se but the effectiveness of the legal system in defending individual rights more generally. It then develops an NIE approach to analysing the role the law plays in the process of development. The frameworks used by Oliver Williamson and Douglass North to analyse institutions are outlined and compared. An extended version of Williamson’s approach is used to demonstrate the constraints imposed on institutions by culture and on economic organization by institutions. The chapter closes with a demonstration that culture can explain the differential pace of reform in European transition countries.

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