A Political Economy Approach
- New Horizons in Law and Economics series
Edited by Alain Marciano and Jean-Michel Josselin
Chapter 7: Rule of law, finance and economic development: cross-country evidence
7. Rule of law, ﬁnance and economic development: cross-country evidence* Stefan van Hemmen and Frank H. Stephen 1 INTRODUCTION Starting with the contributions of La Porta, Lopez-de-Silanes, Shleifer and Vishny (1997a, 1998), and concerned with the production of economically eﬃcient laws, law and economics scholars have increasingly focused their attention on the chain which connects legal rules (that is, formal institutions) and their enforcement to ﬁnancial and economic growth. This approach has potential interest for policy makers and responds to the needs of governments involved in large-scale economic reform programmes. The focus on institutions and their importance for economic development (Davis and North 1971; North 1981, 1990) connects with the so-called ‘structural reforms’ that have been actively encouraged by the World Bank and the International Monetary Fund (IMF) in the last ten years or so. In terms of Williamson’s (2000) conceptual framework, reforms have eﬀects on both the institutional environment and on governance. Changes in the former may take 10 to 100 years to evolve (or are socially and economically too costly to be achieved in the short term), setting the context within which governance structures are designed. Policy makers are conditioned by institutions that can be taken as exogenous in the short term. Rodrik et al. (2004) ﬁnd it helpful to think of policy as a ﬂow variable, in contrast to institutions, which is a stock variable. They view institutions as the cumulative outcome of past policy actions: Policies pursued over a short time span, say 30...
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