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Law,Finance, Economic Growth and Welfare: Why Does Legal Origin Matter?

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  • Simplice A. Asongu

    () (African Governance and Development Institute, Yaoundé, Cameroon)

Abstract

This paper proposes four theories on why legal origin influences growth and welfare through finance. This article provides empirical validation on these theories. It is a natural extension of “Law and finance: why does legal origin matter?” by Thorsten Beck, Asli Demirgüç-Kunt and Ross Levine (2003). We find only partial support for the Mundell (1972), La Porta et al. (1998) and Beck et al. (2003) hypotheses that countries which have adopted or adapted the British common law system (a British colonial legacy) tend to have better developed financial intermediaries than countries which adopted the French legal system or civil law. Common law systems have evolved over the ages and are largely based on consensus and precedent while civil law systems are largely based on a code of law. Countries with English legal tradition have legal systems that improve financial depth, activity and size while countries which apply French legal system or an adaptation of it overwhelmingly dominate in financial intermediary allocation efficiency. Countries which practise Portuguese legal system fall in-between.

Suggested Citation

  • Simplice A. Asongu, 2015. "Law,Finance, Economic Growth and Welfare: Why Does Legal Origin Matter?," Institutions and Economies (formerly known as International Journal of Institutions and Economies), Faculty of Economics and Administration, University of Malaya, vol. 7(2), pages 30-55, July.
  • Handle: RePEc:umk:journl:v:7:y:2015:i:2:p:30-55
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    References listed on IDEAS

    as
    1. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-558, June.
    2. Simplice Asongu, 2014. "Are proposed African monetary unions optimal currency areas? Real, monetary and fiscal policy convergence analysis," African Journal of Economic and Management Studies, Emerald Group Publishing, vol. 5(1), pages 9-29, April.
    3. Allen, Franklin & Qian, Jun & Qian, Meijun, 2005. "Law, finance, and economic growth in China," Journal of Financial Economics, Elsevier, vol. 77(1), pages 57-116, July.
    4. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 1999. "The Quality of Government," Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(1), pages 222-279, April.
    5. Berkowitz, Daniel & Pistor, Katharina & Richard, Jean-Francois, 2003. "Economic development, legality, and the transplant effect," European Economic Review, Elsevier, vol. 47(1), pages 165-195, February.
    6. Simplice A. Asongu, 2013. "Fighting consumer price inflation in Africa: What do dynamics in money, credit, efficiency and size tell us?," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 5(1), pages 39-60, April.
    7. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
    8. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law and finance: why does legal origin matter?," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 653-675, December.
    9. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    10. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
    11. Simplice A. Asongu, 2013. "Real and monetary policy convergence: EMU crisis to the CFA zone," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 5(1), pages 20-38, April.
    12. repec:hrv:faseco:30747160 is not listed on IDEAS
    13. Beck, Thorsten & Levine, Ross, 2002. "Industry growth and capital allocation:*1: does having a market- or bank-based system matter?," Journal of Financial Economics, Elsevier, vol. 64(2), pages 147-180, May.
    14. Jith Jayaratne & Philip E. Strahan, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 639-670.
    15. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
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    18. Simplice A. Asongu, 2014. "African financial development dynamics: big time convergence," African Journal of Economic and Management Studies, Emerald Group Publishing, vol. 5(2), pages 160-194, July.
    19. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
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    More about this item

    Keywords

    Financial Development; Growth; Law; Welfare;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • K2 - Law and Economics - - Regulation and Business Law
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • P5 - Economic Systems - - Comparative Economic Systems

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