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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 6: Estimating the determinants of growth: an empirical exploration of an NIE framework

An Institutional Critique

Frank H. Stephen

Extract

Chapter 6 develops and estimates an econometric model of the determinants of growth to illustrate the insights gained from using the NIE-based framework developed in Chapter 4. It demonstrates the influence of the legal environment on the size of the financial sector and the influence of culture on the legal environment including the effectiveness of the legal system. The benefits of information enhancing institutions in promoting financial sector development (FSD) are also demonstrated. The model is used to test the competing claims of legal origin and culture in explaining the content and effectiveness of a jurisdiction’s laws. The tests suggest a limited impact of legal origin beyond that of culture in these respects. They also provide support for the transplant effect. These results suggest that legal reform to support a market-based approach to development must take account of the cultural context in which it is taking place.

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