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Contract enforcement, investment and growth in Uruguay since 1870

  • Sebastián Fleitas


    (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)

  • Andrés Rius


    (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)

  • Carolina Román


    (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)

  • Henry Willebald


    (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)

Institutions and their quality are central concepts in the recent development and institutional economics literatures. Our hypothesis is that inadequate contract enforcement has hindered investment and, in consequence, indirectly has had a negative effect on Uruguay’s long-term growth performance. We first review the main concepts and the approaches to define and measure the quality of contract enforcement. We then introduce one measure that has the advantages of being measurable into the past and not depending on subjective judgments; namely, the “contract intensive money” (CIM)indicator proposed by Clague et al. (1999). Using our long series for the CIM indicator, and extending key macroeconomic variables backwards to 1870, we are able to estimate a structural model to explore the plausibility of our hypothesis. In the estimation, based on the seemingly unrelated regressions (SUR) method, we find support for the thesis that the quality of contract enforcement influences growth through its impact on investment. Put differently, our results suggest that poor contract enforcement played a significant role at the root of Uruguay’s underperformance, and in its experience of (relative) long-run decline.

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Paper provided by Instituto de Economía - IECON in its series Documentos de Trabajo (working papers) with number 13-01.

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Length: 31 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:ulr:wpaper:dt-01-13
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