The Law Matters – Common Versus Roman Law in Economic Development

It’s not just mere Brexity nationalism that tells us that the differences between Roman and Common law matter in economic development. It is actually one of these truths about the world around us. As such, subsuming the UK into a Roman law environment always was a bad idea:

Legal origins
Rafael La Porta, Florencio Lopez de Silanes, Andrei Shleifer, Robert Vishny 27 July 2019

Colonisation created ‘legal families’ of laws which were substantially influenced by the origin countries. This column, taken from a Vox ebook, discusses how these legal families often exhibit substantively different legal rules and approaches, which then have a significant influence on economic outcomes.

The history of conquest and colonisation has left a profound impact on the culture and institutions of affected countries. Perhaps the most obvious example of this is language. People in the US speak the language of their coloniser, Britain; people in South American speak Spanish, with the exception of the Brazilians, who speak the language of their coloniser, Portugal. Another obvious example is religion: South Americans are Catholic, thanks to many forced conversions; North Africans are Moslem, for the same reason. A less obvious example is sport: people play soccer in French Africa and South America, as they do in France and Spain; but they play rugby in South Africa, Australia, and New Zealand, as they do in the UK. The Cubans, long under profound American political and economic influence, still play baseball, despite over half-a-century of anti-American rule.

Perhaps the more economically relevant example of such transplantation is provided by a country’s laws, particularly its commercial laws. Countries colonised by the UK typically have laws significantly influenced by those of England; countries colonised by France, Spain, and Portugal have laws influenced by their respective colonisers. Spain and Portugal themselves have laws heavily influenced by those of France, which they inherited from the Napoleonic conquest. Sometimes such legal transplantation takes the simple form of the copying of laws; other times the influence is less direct, driven by commonality of language and the training of lawyers and politicians, which often took place in the colonising country or at universities it established in its colonies.

These patterns of conquest and colonisation created so-called legal families of laws substantially influenced by the origin countries. England and its colonies, including the US, are part of the common-law family; France, Spain, Portugal and their colonies are part of the French civil-law tradition. There are also less widely spread but distinctive Scandinavian, German, and – fortunately disappearing – socialist legal traditions. None of these legal traditions determine the laws of countries that belong to them completely, and there is clear evidence of legal change, evolution, and reform, but legal origins nonetheless exert a substantial influence for centuries. Figure 1 illustrates the spread of legal traditions around the world.

Figure 1 The distribution of legal origin

What is perhaps most interesting for an economist is that legal traditions exhibit distinctive formal features as well as substantive approaches to how the law regulates economic life. At the formal level, the common law is formed by appellate judges, who establish precedents by solving specific legal disputes. Dispute resolution tends to be adversarial rather than inquisitorial. Judicial independence from both the executive and the legislature is central. The civil law tradition dates back in its formal features to Roman law, and spread through Continental Europe after Roman law was rediscovered during the Middle Ages in Italy. It uses statutes and comprehensive codes as primary means of ordering legal material, and relies heavily on legal scholars to ascertain and formulate rules. Dispute resolution tends to be inquisitorial rather than adversarial. Judicial independence is not as big an issue.

As legal scholars have long recognised, the differences in legal traditions are not merely formal. The common-law tradition tends to be less interventionist and more supportive of private economic arrangements. The civil-law tradition tends to be more dirigiste, and more focused on the state constraining such arrangements. In the words of one legal scholar, civil law is ‘policy implementing’ while common law is ‘dispute resolving’ (Damaška 1986). In the words of another, French civil law embraces ‘socially-conditioned private contracting’, in contrast to common law’s support for ‘unconditioned private contracting’ (Pistor 2006). These are profound historically shaped features of the stance of the law, which, through transplantation, have continued to run in legal families.

A critical feature of legal transplantation that makes it helpful for investigating the effects of laws on economic outcomes is that, like conquest and colonisation themselves, it is largely involuntary. Although, in a few cases, such as Russia in the 19th century or Japan after the Meiji restoration, a country borrows commercial laws purely voluntarily, in most cases, such as those described above, the transplantation is either forced or is a by-product of a forced political change. As a consequence, one can think of it as largely exogenous, and examine its economic and social consequences.

In light of this history, it is perhaps not surprising that legal families often exhibit substantively different legal rules and approaches, which then have a significant influence on economic outcomes. In a pair of papers that we wrote 20 years ago (La Porta et al. 1997, 1998), we applied this approach to corporate law. We found, consistent with the broad view of the stance of the law, that common-law countries are more protective of outside investors, including both creditors and shareholders, than civil- law countries, while the latter tend to be more protective of insiders and to give outside investors fewer rights. These differences are manifested in the many specific legal rules which we summarised by creating indices of shareholder and creditor protection. Most importantly, we showed that these quantitative measures of investor protection are associated with indicators of financial development. Corporate ownership is more dispersed, both debt and equity markets are larger, and dividend payouts and corporate valuations are higher in common- than in civil-law countries (La Porta et al. 1997, 1998, 1999, 2000, 2002). Legal origins affect legal rules, legal rules affect investor protection, and investor protection affects financial structure.

Since these papers were written, a significant literature has revisited these findings. Some of our measures of investor protection were correctly criticised, and we revised and extended them (e.g., La Porta et al. 2006, Djankov et al. 2008). There was a question over whether the patterns of financial development we have identified have also existed historically, and the best available evidence indicates that they have (Hildebrand 2016). Some scholars argued that our legal origins are merely proxies for politics, with civil law standing in for social democracy. In the data, the patterns we described hold for dictatorships as well as democracies, rejecting this political interpretation (La Porta et al. 2008).

We have also investigated whether the procedural and organisational differences between the legal systems stressed by legal scholars can be quantified. We have found that, indeed, courts in common-law countries tend to be more independent from the executive branch than courts in civil-law countries, with longer judicial tenure and greater limits on firing judges (La Porta et al. 2004).  Common-law legal procedure   is also less formalised, with fewer written or formal steps necessary to move disputes forward, fewer filings, and more limited possibilities of appeal. Moreover, these procedural differences translate into substantive outcomes: other things being equal, it generally takes longer and costs more to evict a non-paying tenant, or to collect a bounced cheque, in a civil- than a common-law country (Djankov et al. 2003). The quantitative evidence is broadly consistent with the broad perspective of comparative law.

A further question one can ask is whether differences in legal origins also show up not just in legal rules, but also in patterns of government regulation. We investigated this question together with Simeon Djankov of the World Bank, who went on to create the extremely influential World Bank Doing Business Report, based on our findings. Thanks to the cooperation with the World Bank, we were able to assemble large data sets on government regulations affecting business activity in many countries. We began by examining the regulation of entry of new firms, by calculating the number of formal steps, and the minimum time and cost it would take to open a business legally (Djankov et al. 2002). We also looked at government regulations of labour markets (Botero et al. 2004). Here as well, consistent with the comparative law approach, we found evidence of much heavier regulation in civil- than in common-law countries. The evidence    on regulations confirmed the fundamental differences in how legal systems approach social control of economic life.

We also found that these regulatory differences correlate with economic outcomes. For example, countries with fewer entry regulations tend to have less corruption, which   is typically a by-product of a heavy regulatory stance. They also, not surprisingly, have more official employment, all else being equal. Countries with heavier labour regulations, not surprisingly, exhibit higher unemployment rates – especially among the young — and lower rates of labour force participating. Here as well, the broad stance of the law appears to influence important economic outcomes.

Given this evidence, one might ask whether legal origin is destiny, and whether legal rules and regulations are permanently fixed given a country’s tradition. The answer to that is a most decisive ‘no’. It is certainly the case that in some core areas of law, such as legal procedure, we have found very slow change and a huge amount of persistence (Balas et al. 2010). In other areas, however, there has been a lot of change. The extraordinary popularity of the World Bank Doing Business Report around the world has prompted many countries to revise some of their most burdensome regulations, particularly in the field of regulation of entry. In fact, some countries, such as Georgia, sought to attract foreign investors based on their high ‘Doing Business’ scores and massive regulatory reforms, while others, such as New Zealand, ran political campaigns based on their outstanding scores.

In sum, there is little doubt at this point that legal traditions are associated with distinctive formal and substantive approaches to solving legal problems, and that these approaches are associated with some distinctive economic outcomes. How large the substantive consequences are remains an open question. In our work, we have strenuously stayed away from claiming that legal traditions and legal rules influence economic growth. This observation is part of a more general proposition that the only consistent determinant of long-run growth is human capital and even major institutional differences, such as dictatorship versus democracy, are not evidently correlated with growth. But if one is interested in outcomes that are a bit less aggregate – including financial development, the role of the formal sector, or unemployment – then the significance of legal traditions in shaping these outcomes is much clearer in the data

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nae a belgerQuentin Vole Recent comment authors
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Quentin Vole
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Quentin Vole

My theory (that is mine and which belongs to me – like Miss Anne Elk, I am no subject matter expert) is that the Common/Roman law divide between England* and the Continent is another instance of British exceptionalism within the EU. Not just in the economic terms described above, but in personal freedom (everything not forbidden by statute is lawful, rather than only that which is permitted by statute is lawful) and also in the ways in which individuals comply with the law of the land and with interpersonal agreements. What follows is only anecdotal – and I’m very conscious… Read more »

nae a belger
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nae a belger

If the picture can’t even show that Scotland is not under the English legal system then I am not filled with confidence for the rest of the article