T HE N EW C OMPARATIVE E CONOMICS Simeon Djankov, World Bank Edward Glaeser, Harvard University Rafael La Porta, Dartmouth College Florencio Lopez-de-Silanes,

THE NEW COMPARATIVE ECONOMICS

Simeon Djankov, World BankEdward Glaeser, Harvard UniversityRafael La Porta, Dartmouth College

Florencio Lopez-de-Silanes, Yale UniversityAndrew Shleifer, Harvard University

Economics 980l: Macroeconomics and PoliticsTuesday, October 30, 2007

“Is comparative economics dead?”

• Comparative economics historically: socialism vs. capitalism

• Comparative economics today: differences among capitalist economies→ How institutions affect economic performance

Historical Background

• Enlightenment Economists: Good economic institutions make for good economic growth

• Good institutions…Secure property rights, enforce contracts, resolve disputes, protect investment returns

• Problem with property rights:Government that secures property may also take it away

Two Challenges to Property Rights

• On Security of Property: Hobbes v. Montesquieu“War of all against all” vs.“Nation in slavery labors more to preserve than to acquire”

• Two challenges: Disorder and DictatorshipEither your neighbor may steal your property, or your government

• Institutions designed to control both – at onceSuccess varies, affecting economic performance

The New Comparative Economics

The study of the different ways countries design institutions to resolve the conflict between the

twin goals of controlling disorder and dictatorship at once.

The Study of Questions, such as…How much government ownership is desirable?

How much should governments regulate?How hard should the government fight disorder?

Is democracy or authoritarianism better for reform?In democracies, do economies do better under divided or consolidated government?

Is a federal structure better for economic transformation?

The Purpose of this Paper

• Part 2: Overview of the Framework• Part 3: Three Illustrations• Part 4: Transplantation – legacies of colonial policies• Part 5: Politics• Part 6: Conclusion

To provide a framework for considering the dictatorship-disorder tradeoff, as well as its

implications and application

The rest of the presentation will therefore go as follows:

OVERVIEW OF THE FRAMEWORKSection 2

Basic Framework

Disorder • Private expropriation by:

– Banditry, Murder, Theft– Violation of contracts, torts– Monopoly pricing

• Private subversion of public institutions by:– Bribes and threats

Dictatorship• Expropriation by the state via:

– Murder, Taxation– Violation of property– Artificial barriers to

market entry, competition– Corruption

Risk to individuals and their property comes from…

→ Institutions function to control these twin dangers of disorder and dictatorship…

The TradeoffInstitutional Possibility Frontier (IPF):

The efficient institutional choice for a given society or sector within society

Institutional Possibility Frontier (IPF):

Determinants of the IPFSlope and distance from origin determined by “Civic Capital”:• Culture• Ethnic heterogeneity/strife• Factor endowments, geography• Social capital (e.g. history of cooperation in pursuit of public goods)• Technology of production• Efficiency of taxation• Human capital

Objective: Reduce disorder from…• Monopoly pricing• Torts (e.g. breaches of contract)• Predatory Tactics

Alternatives: Degree of public control…1. Individual market discipline 2. Litigation3. State regulation4. State ownership

Constraints: Institutional capacity…• Civic Capital• Other state-specific characteristics

Institutional Possibility Frontier (IPF):

An Example: Social Control of Businesses

ILLUSTRATIONS OF INSTITUTIONAL DESIGN

Section 3

3.1 — Twelfth/Thirteenth Century Legal Systems: France and England 3.2 — Progressive era rise of the regulatory state: United States 3.3 — Post-communist transition: Eastern Europe

Legal Origins

England: Common Law• Fact-finding juries• Independent judges• Infrequent appeals• Reliance on precedent

France: Civil Law• Fact finding by

state-employed judges• Decisions automatically

reviewed• Judges bound by procedural

and substantive codes, rather than discretion

(Glaeser and Shleifer 2002)

Strong King, Weak Nobles Weak King, Strong Nobles

Legal Origins(Glaeser and Shleifer 2002)

The Rise of the Regulatory State

• Before 1900, commercial disputes in the U.S. resolved by private litigation

Before the Civil War, this worked – litigants were of relatively equal status

• Disorder increases with Post-Civil War industrialization

Monopolies, Unsafe conditions for workers/passengers, Increased inequality, litigation less effective – robber barons hire better lawyers and bribe judges

• Progressive movement calls for more regulation

(Glaeser and Shleifer 2003)

The Rise of the Regulatory State(Glaeser and Shleifer 2003)

Institutions in Transition

→ Communism falls…• Russia: Dictatorship drops, disorder spikes

End communist control, entrepreneurship, unofficial economy reaches 40% economic activity

• Belarus: Dictatorship same, disorder samePersonal dictatorship replaces communists, structures of controls kept intact

• East Europe: IPF near origin, disorder increasesIPFs already closer to origin, end communist control, increased capitalist activity

Institutions in Transition

TRANSPLANTATION OF INSTITUTIONS

Section 4

World Imperialism c.1900

World Imperialism c.1900Legal Origins

Some Prior Work on Transplantation

• La Porta et al. (1997, 1998)Legal origin affected investor protections, and thus affected financial development

• Djankov et al. (2002, 2003), Botero et al. (2003)Countries’ control of businesses related to origin of laws

• La Porta et al. (2004)Judicial independence associated with common law independence; good for business

• Acemoglu et al. (2001)Quality of institutions today related to whether colony was a settlement and cultivated or an outpost and exploited

→ All of these legacies affect the present IPF!

Transplantation and the IPF

• Different colonial legal systems led to different present business environments

• Legal origin and investor protection correlated with aspects of financial development

• Transplantation profoundly influenced present social control of business

• Observed institutional choices may be inefficient

Legal Systems and the IPF

Legal Systems and the IPF

Transplantation leads to…• Higher dictator-disorder

equilibrium• Excessive state

intervention and regulation – especially in civil law countries

• Developing countries need less regulation for efficiency

POLITICSSection 5

Politics and the IPFInstitutional Possibility Frontier (IPF):

Politics Can Increase Inst’l Efficiency

• Institutions evolve and become more efficient as they face new circumstances

• Pro-efficiency interest groups capture government

• Coasean bargaining leads to efficient institutional choice

• Voting leads to more efficient institutions

Influence of Politics on Institutions

• Politics: a negotiation between interests• Success of negotiations depends in part on

civic capital• Location of IPF and political choice of a point

on the IPF are not entirely independent• Not all poor institutional outcomes can be

blamed on politics

CONCLUSIONSSection 6

General Conclusions

• Different institutions will be appropriate for different circumstances

• The diversity in institutional arrangements can be understood as a tradeoff between dictatorship and disorder

• An inefficient – or more efficient – tradeoff may arise from political forces

• Reforms in each country must be evaluated relative to its own institutional opportunities

Looking Forward

• Recent history has called new attention to the role of institutions in macroeconomics

• This framework offers a systematic way to compare different countries’ different institutions, and different economic outcomes

• It is this type of comparative perspective of institutions that is at the heart of the new comparative economics

Thank you.