A workshop to be held in Florence, Villa Finaly,
September 29th – October 1st, 2011
(DRM, University Paris Dauphine-PSL* and CNRS & RSCAS, European University Institute)
(CERI, Sciences-Po and CNRS)
There is now a large consensus that the state and the law play a critical role in economic development. Yet there is far less consensus regarding how, and under what conditions, they will be supportive rather than obstructive. Confusion reigns at these crossroads: the normative versus the analytical perspective, and the comparative versus the historical one.
For instance, the rule of law is most often envisaged as a superior expression of fairness, predictability, enfranchisement, and possibly freedom. It will typically also be associated with a relatively decentralized, transparent, and nonhierarchic mode of governance. In contrast, states and executive bureaucracies have a bad name: they are freighted with the unpleasant aspects of centralization, asymmetries of information, and capture. Still, most would agree that this "good cop, bad cop" approach is wanting. To start with, it is hard to imagine how the rule of law could be sustained without extended public bureaucracies.
In other words, the challenge is to account simultaneously for two dimensions of modern liberal states. First is the legal order, or the hierarchy of norms and jurisdictions: it establishes individual rights, guarantees open access, and ensures normative consistency. Thus, the legal order addresses the construction of an open playing field on which enfranchised agents can safely invest and transact. Yet because free enterprise and self-organization might result in local monopolies or entrenched coalitions, courts and lawmakers must constantly defend the principles of equality and competition. In many developing countries, the failure to establish a working legal order is evidenced by a wide-scale "informal sector" in which private or local orders—tribes, village communities, mafias—compete with the weak or fractured legal order.
The second institutional dimension of state-building is public bureaucracies that deliver—in return for taxes paid—a more or less extended set of public goods: infrastructure, social protection, education, security, and health. These bureaucracies are generally labor-intensive, complex to manage, and costly to operate. They are also prone to capture and are unevenly accountable and efficient. Over time, their contribution to social welfare certainly affects the willingness of citizens to pay taxes and abide by the rules. In some cases this will result in a greater provision of public goods and perhaps a more legitimate social order, whereas capture and extortion lead to a less promising outcome.
In short: the objective of this workshop is to reach a better understanding of how the legal order and the bureaucracies are built and how they interact in development.
We propose to focus the presentations and discussions on four empirical themes with high potential for offering new insights on this triangular relationship. We expect substantial benefits from incorporating a variety of perspectives: economists, historians, lawyers, and political scientists are welcome, whatever their methodological preferences and analytical viewpoints.
The papers discussed during the workshop should be published in a special issue of a major journal.
12h30 – 14h00 Buffet Lunch and Welcome Drink
Afternoon session: 14h00-19h10
Chair: Stefano Bartolini (RSCAS, EUI)
16h20 – 16h50 Coffee break
Morning session: 9h00-13h00
Chair: Giorgia Giovannetti (European University Institute)
10h10 – 10h40 Coffee break
13h00 – 14h15 Lunch break
Afternoon session: 14h15-18h10
Chair: Adrienne Héritier (European University Institute)
16h35 – 17h00 Coffee break
20h30 Gala Dinner
Morning session: 9h00-13h00
Chair: Giorgio Monti (European University Institute)
10h10 – 10h40 Coffee break
13h00 – 14h15 Lunch break
Afternoon session: 14h15-18h10
Chair: Jean-Michel Glachant (European University Institute)
16h35 – 17h00 Coffee break
Lee Alston (University of Colorado), Marcus Melo (University of Pernambuco),
Bernardo Mueller (University of Brazilia), Carlos Pereira (Michigan State University)
“Development in the Modern World: Power, Beliefs and Institutions with an Application to Brazil”
Why haven't more countries achieved sustained economic development given the presence of role models in the modern world? We present a framework to analyze modern economic and political development; and apply the framework to understand the transition in Brazil over the past half-century with an emphasis on 1994 as a ‘turning point’ to a virtuous path of institutional changes. Our framework consists of interconnected concepts: power, beliefs, institutions, windows of opportunity and leadership. The dynamics amongst these elements produces outcomes that may induce changes in economic and political openness. Development is viewed as following a path which produces either incremental changes in institutions; or big changes in institutions, when the rental streams from institutions no longer match the expectations of those in power. The hyperinflations in Brazil prior to 1994 instilled a latent belief in macro-stability that President Cardoso tapped, which allowed him to sustain a series of virtuous institutional deepening.
Kivanc Karaman (Bogazici University, Istanbul)
“Historical Roots of the Absence of Rule of Law in the Middle East: Impacts of Geography and Military Technology”
This paper investigates the impacts of geography and military technology in the first half of the second millennium on the absence of rule of law in the Middle East. The argument builds on the observation that due to differences in local geography, the dominance of equestrian warfare between 10th and 16th centuries induced political stability in Western Europe and instability in the Middle East. While the de facto political settlement in Europe was formally codified into law, the volatility of the Middle Eastern politics precluded such a development. The evidence from the late Ottoman Empire suggests that institutional inertia ensured persistence of the divergence in legal trajectories even after equestrian warfare became obsolete. Islamic Law applied only to civil matters, and hence played a minor role in explaining the absence of rule of law.
Debin Ma (LSE, Dept of Economic History)
“Rock, Scissors, Paper: the Problem of Incentives and Information in Traditional Chinese State and the Origin of Great Divergence”
This article posits that the political institution of imperial China – its unitary and centralized ruling structure – is an essential determinant to China’s long-run economic trajectory and its early modern divergence from Western Europe. Drawing on institutional economics, I demonstrate that monopoly rule, a long time-horizon and the large size of the empire could give rise to a path of low- taxation and dynastic stability in imperial China. But fundamental incentive misalignment and information asymmetry problems within its centralized and hierarchical political structure also constrained the development the fiscal and financial capacity of the Chinese state. Based on a reconstruction of two millennia records of incidences of warfare, this paper develops a narrative to show that the establishment and consolidation towards a single unitary monopoly of political power was an endogenous historical process. Using data series on warfare and government revenue for 17- 19th century, I illustrate the Qing imperial rule as an epitome of the traditional Chinese political economy.
Gary W. Cox (Stanford University), Douglass C. North (Washington University in St. Louis),
Barry R. Weingast (Stanford University)
“A a New Framework for Understanding Political Development: Perpetual Political Order and Economic Development”
Standard approaches to development lack both a definition and theory of political development. This absence leads development theorists to focus on the key pillars features of political development, such as democracy, property rights, and the rule of law. The problem with this list is that these are goals of development, not the elements that create it.
In this paper, we develop a new framework for understanding political development. We focus on creating perpetual order, especially the control of violence and executive moral hazard. Actors know that challenges to stability arise regularly in the form policy dilemmas, crises, and unanticipated circumstances – the world is non-ergodic, as North (2005) emphasizes. A central feature of political development is that crises are resolved peacefully; in particular, without a violent expulsion of the ruler or massive, violent regime change. Defined in this way, political development is a necessary condition for economic development. We show that this approach to political development has a surprising range of implications.
Gillian Hadfield (University of Southern California Law) and Barry R. Weingast (Stanford University)
“Law without Coercion: Examining the Role of Law in Coordinating Collective Punishment”
Although most economic and positive political theory presumes the existence of an effective legal regime (protecting property rights or implementing legislative or judicial choices, for example), behavioral social science has devoted little systematic attention to the question of what constitutes distinctively legal order. Most social scientists take for granted that law is defined by the presence of a centralized authority capable of exacting coercive penalties for violations of legal rules. This unexamined presumption, however, leaves us with few tools in social science to answer key questions about the emergence and maintenance of legal order. A focus on centralized coercion fails to distinguish between spontaneous social order based on social norms and deliberate order structured by organized efforts to create and enforce rules in the absence of centralized coercion. In this paper we discuss several settings in which centralized coercive force is absent and yet social order relies on distinctively legal attributes and institutions. Drawing on a model developed in Hadfield & Weingast (2011), we use these settings to show how distinctively legal attributes and institutions work to coordinate decentralized collective punishment. We focus in particular on how legal institutions reduce ambiguity and solve incentive problems to support a decentralized equilibrium characterized by compliance with deliberately chosen rules. We thus sketch out how a social scientific account of law can help distinguish social norms from legal rules and identify the institutions that support legal order in a wide range of settings that do not presume the existence of centralized coercion.
Frank K. Upham (New york University School of Law)
“Creating Law from the Ground Up: Land Law in Post-Conflict Cambodia”
Since 1990 successive waves of foreign experts have introduced into Cambodia legal transplants dealing with the ownership, use, and possession of land. Each law was based on the biases of the particular foreign sponsor without meaningful national participation or donor cooperation. The result is an inconsistent and incomplete legal framework that lacks domestic legitimacy but, perversely, provides a façade of respectability behind which foreign investors and domestic elites exploit legal ambiguities for corrupt gain. The Cambodian experience brings into question not only the wisdom of foreign intervention but also the desirability of any form of formal legal construction in a society without the necessary social and political pre-requisites.
Christopher Kingston (Amherst College)
"The development of marine insurance institutions, 1350–1850."
From its origins in the fourteenth-century Italian city-states, the practice of marine insurance, and its associated governance institutions, spread throughout western Eu- rope and later to America. This paper describes the long-run historical development of marine insurance institutions, and considers implications for theories of institutional change. What role did legal and non-legal governance institutions play, and how did they evolve? How did the international nature of the market affect this evolution, and how much influence did rulers, bureaucrats, lawmakers and courts have on institutional development? What drove the choice of organizational form, and how did the use of particular forms spread?
Charles Calomoris (Colombia University), Stephen Haber (Stanford University)
“Fragile Banks, Durable Bargains: Why Banking is All About Politics and Always Has Been”
Why is it so hard to create stable banking systems that allocate credit efficiently? Why do we observe a world in which banking systems often allocate too much credit to firms and households that are poor risks, resulting in systemic banking crises? Why do we also observe banking systems that persistently constrain credit so tightly that economic growth and social mobility are choked off? Why is it so hard for countries to find a comfortable middle ground in which credit flows to talented entrepreneurs and responsible households, and in which taxpayers are not forced to periodically rescue bankers from the consequences of their own mistakes? The answer provided by this paper is that the property rights system that structures banking is not a passive response to some efficiency criterion, demanded in an anonymous “market” for institutions; rather it is the product of political deals agreed among coalitions of market participants, which are intended to improve the welfare of the members of those coalitions, not the society at large. Those deals are possible because the economic incentives of the bank majority shareholders (the insiders), minority shareholders, depositors, debtors, and taxpayers are not inherently aligned—and because the parties in control of the government have ample incentives to exploit those differences in incentives for their own political or economic ends. In order demonstrate this phenomena we trace the co-evolution of politics and banking in detail for six countries, one country at a time, over a time span of two hundred years.
Peter Grajzl (Washington and Lee University), Nataliia Laptieva (Central European University)
“Information Sharing and the Volume of Private Credit in Transition: Evidence from Ukrainian Bank-Level Panel Data”
The effect of lenders' information sharing on the volume of credit is ambiguous in theory and underexplored empirically. Departing from the scant existing literature, which draws on country-level aggregate data, we study the impact of information sharing on the volume of private credit by examining unique bank-level panel data from Ukraine, a transition economy where formal information sharing among banks is only a recent phenomenon. Employing the fixed-effects framework and dynamic panel methods to address endogeneity due to the non-exogenous nature of banks' choice to participate in information sharing, we find no credit volume effect of information sharing when information sharing takes place through the central bank-administered public credit registry. In contrast, information sharing through private credit bureaus is associated with an increase in the volume of bank lending, in particular when a bank is partner of multiple private credit bureaus. While not large in magnitude, this effect is robust to a variety of controls and specifications.
Daniel Berkowitz (University of Pittsburgh), Mark Hoekstra (Texas A&M University), Koen Schoors (Gent University),
“Finance and Growth: A Counter-Example from the Origins of Banking in Russia”
This paper examines the effect of banking on economic growth in modern Russia. To overcome simultaneity and selection, we exploit regional banking variation induced by the creation of “specialized banks” in the last years of the Soviet Union (1988-1991). Consistent with the qualitative work of Hellman  and Johnson , we show that these reforms generated an ideal natural experiment in that the concentration of specialized banks is jointly uncorrelated with predictors of future growth, including pre-banking income, unemployment, anti-market sentiment, institutional quality, and government interference in the economy. Results indicate that while the presence of one additional specialized bank per million inhabitants increased total within-state lending to private firms and individuals by 10 to 20 percent in the early 2000s, it had no effect on investment or per capita income, though it did modestly reduce unemployment. Data on lending suggest this ineffectiveness may be due to lower risk-taking and greater government connections. Thus, evidence here suggests that private ownership in the context of a competitive market may not be sufficient to transform socialist institutions. Instead, it indicates that the political origins of banking are important in determining whether finance affects growth.
Carmine Guerriero (University of Amsterdam)
“Endogenous Legal Traditions and Economic Outcomes”
The law and the economy are deeply influenced by legal institutions and, above all, by the lawmaking rule—i.e., the institutions identifying the authority aggregating the citizens’ preferences over the harshness of punishment. While under case law appellate judges’ biases offset one another at the cost of volatility of the law, under statute law the Legislator chooses certain laws that are biased whenever she favors special interests: i.e., when the preference heterogeneity is sufficiently high and/or the political process sufficiently inefficient. Hence, case and, in general, common law should produce better performances only in the last scenario. Instrumental variables estimates based on a sample of transplanted countries confirm this prediction.
Peter Murrel (University of Maryland)
"Notes on a New Whig Interpretation of English History: The Institutional and Cultural Prerequisites of Development”
Suppose the world comprises politico-economic agents fumbling uncertainly towards vague goals, focused on solving immediate problems, and lacking the capacity to deduce the character of the equilibrium to be produced by new measures they design. That is, suppose the world is very much like the one in which we live. How can one derive normative lessons about institutions and culture in such a world? This paper uses two related methods. First, I look to the theoretical literature that uses evolutionary methods to understand cultural and institutional processes. By interpreting the results of that literature, I develop normative lessons relevant to the properties of these processes. Second, I look to a real-world example of a development experience uniformly regarded as quite successful. I identify features of 17th century England that could have led to productive evolutionary institutional and cultural processes. Not the least of these features was a legal and political culture that took an evolutionary model of law and politics seriously.
Anu Bradford (Law School, U. of Chicago)
“European Regulatory Imperialism”
This Article examines Europe’s unilateral power to regulate global commerce. The EU exercises unprecedented global power not through its military or economic might but through law—by actively, and successfully, exporting its legal institutions and standards to the rest of the world. Markets have a limited ability to act as a constraint to the “Europeanization” of global economic activity given that the EU primarily regulates policy areas of low-elasticity, including consumer markets. International institutions have similarly only a limited ability to dampen EU’s regulatory ambitions as regulation of areas such as privacy or antitrust do not fall under the purview of the WTO or other international institutions. The greatest check on EU’s regulatory powers comes from within the EU itself. As the EU’s powers grow, divisions within the EU also grow. Thus, in the end, the greatest constraint to the EU’s regulatory imperialism stems from the EU’s own evolving conception of how far its regulatory powers ought to reach.
Benito Arruñada (Pompeu Fabra University) and Stephen Hanssen (Pompeu Fabra University)
“Market Instruments in Public Sector Reform”
The paper first relates problems of the traditional organization of public good provision to those of discretionary expense centers as described in the managerial accounting literature. Such centers are characterized by poor user and supplier incentives as well as overproduction. The paper then considers market elements such as user choice, user fees, and supplier performance pay as solutions, and argues that the primary challenge is to use them to improve incentives while controlling external effects. In many cases, the optimal organization may be a hybrid that mixes elements of bureaucratic administration and markets. It compares the organization of the land registries of Spain and England and Wales to illustrate the main ideas.
Barry Naughton (School of Intl Relations, San Diego)
“Inside and Outside: The Modernized Hierarchy that Runs China”
China has dramatically revamped its bureaucracy, ownership system and regulatory regime as part of its transition to a mixed market economy. However, this process has occurred in ways quite different from most expectations. The dual Communist Party-government bureaucracy has been strengthened, and remains hierarchical, but has been modernized and combined with education and training. Conversely, regulatory agencies have rarely attained sufficient independence, and the legal system in general continues to lag behind expectations. The outcome thus far has been a system far more capable, professional, and rule-bound, but still strongly authoritarian, top-down, and with limited accountability. I explore this paradox broadly, and also through a case study of labor grievance procedures.
Eric Brousseau (University Paris Dauphine and EUI) and Jérome Sgard (Sciences-Po)
“The regulation of market access in 18th century, mercantilist France”
The reforms that marked the early period of the reign of Louis XIV (1661-1715) were predicated i.a. on the marginalization of both the traditional representative bodies and the aristocracy. In-between a new model of state and central bureaucracy emerged that was based partly on meritocratic principles and partly on patronage and the farming out official positions. From this original set-up emerged the mercantilist project of Colbert (1661-1683), which aimed at developing a diversified manufacturing basis and an integrated domestic economy. This included a tight control over market entry and the distribution of more or less extended Privilèges to favoured projects.
We have coded 90 such decisions, made by the Bureau de Commerce between 1724 and 1729. The early conclusions are: (i) The decision making process was explicitly plural and formalistic: the higher bureaucrats wanted to make sure that each stakeholder could defend his interest within a collective deliberation, and they then typically confirmed the outcome without considering its substance. (ii) The revealed hierarchy of bureaucratic preferences were to first support technically innovative projects, then those who would have a positive impact on the trade balance, and lastly those that served local markets. (iii) However, the main sources of rents in the economy were off-limit: the Bureau handled marginal cases along quite rational lines, but it had little say on the more sensitive issues like the tax farms, colonial trade or the state-sponsored trading companies.
Chancellerie des Universités de Paris
Italie, 50139 Firenze
Via Bolognese, 134 R
Tel. +39 055 463101
Fax +39 055 461099
Practical information: http://www.villafinaly.sorbonne.fr/infopratiques.html?lang=en_GB&partie=1
The workshop will start on September 29th at 2:00 pm and will finish on October 1st at 6:10 pm.
Basic Format of all sessions:
Presentation: 30 minutes
Discussants: 20 minutes (2 x 10 minutes each)
Questions & general discussions: 15 minutes
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