Measuring the Law:
The Economics of Doing Business
Timothy Fisher and Mark Melatos
Economics
University of Sydney
1
Overview
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economics and law
legal origins theory
Doing Business reports
criticisms of DB methodology
detailed analysis
conclusions
discussion
2
Economics and Law
. . . the rights which individuals possess, with their
duties and privileges, will be to a large extent,
what the law determines. As a result, the legal
system will have a profound effect on the
working of the economic system and may in
certain respects be said to control it.
Ronald Coase, 1991 Nobel laureate
3
Law and economics
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law tries to regulate behaviour
• economics analyses behaviour
EXAMPLE regulating speeding
B
F
p
benefit of speeding
fine if caught
probability of being caught
• individual compares the cost to the benefit
• will not speed if cost exceeds the benefit
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Law and economics
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will not speed if
p × F > B
• e.g., F = 500, B = 20, p = 1% → cost is 5,
benefit is 20 → individual will speed
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implications
• law matters (F )
• enforcement matters ( p)
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Comments
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trade-off between p and F
• higher F can compensate for lower p
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public policy may try to influence B
• e.g., campaign about the dangers of speeding
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point: tools of economics to evaluate
problems of law
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Legal origins theory: seminal paper
“Law and finance”, by La Porta, Lopez-deSilanes, Shleifer, & Vishny, JPE 1998.
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examine financial laws in 49 countries
• corporate governance
• shareholder protection
• creditor rights
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Law and finance
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classify countries by legal origin
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•
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common law: UK, USA, Australia, Canada
civil code: French, German, Scandinavian
conclude: link between legal origin and
development of financial markets
1. Common law
2. Scandinavian and German civil law
3. French civil law
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Legal origins theory
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link between financial market development
and economic development
conclude: legal origin is an important
factor determining economic development
Shleifer appointed by World Bank to
oversee Doing Business project
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World Bank Group (WBG)
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a family of 5 organizations, of which two
• International Bank for Reconstruction and
Development
• International Development Association
are focused on developing countries
• provides grants and low-interest loans
• education, health, agriculture, environment, etc.
• often tied to specific reforms
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Doing Business database
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objective measures of
• business regulations
• enforcement
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input and verification by 3,500+ people
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government officials
lawyers
business consultants
accountants
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Doing Business database
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comparable indicators across 175 countries
• index based on 10 sub-indices
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used to analyze which regulations enhance
or constrain investment, productivity, and
growth
DB published annually since 2004
• attracts widespread media coverage
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Sub-indices in Doing Business Index
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Starting a business
Dealing with licenses
Hiring and firing workers
Registering property
Getting credit
Protecting investors
Paying taxes
Trading across borders
Enforcing contracts
Closing a business
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Ease of Doing Business Index
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Doing Business Index specific rankings
3.
Singapore
New Zealand
U.S.A.
8.
Australia
18.
Thailand
93.
China
135.
Indonesia
1.
2.
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Obvious criticisms
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law reform is ongoing
• origin increasingly irrelevant (dropped 2005)
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errors and omissions
• e.g., Canadian bankruptcy law
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ignores other factors
• wars, corruption, cronyism, hyper-inflation
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Example of “other factors”
“Indonesian public services hit by unskilled
spending” Financial Times, February 12, 2007.
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inflexible budgetary system
inadequately trained civil service
• especially at local government level
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unable to spend increasing fiscal resources
• unspent reserves at 3.1% of GDP in 2006
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Criticisms of the methodology
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national legal experts
• who are they? how are they chosen?
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optimality of law
• index is based on WB preferences
• e.g., index favours easy dismissal of workers
• not necessarily optimal
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Outputs versus inputs
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real issue: does law achieve its goal?
• WB index does not measure outcomes
• measures the law (inputs)
• empirical study of law
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point: may be many ways to reach goals
• many laws may be compatible with a given
goal
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DB reports
• Poor countries regulate more
Schleifer (2005, EFM)
“… American and European societies are
much richer today than they were 100
years ago, yet they are vastly more
regulated.”
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Types of Regulation
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“Procedural” vs “Behavioural” regulation
• Transaction form vs quality
• Behavioural regulation as a response to
market failure
• Social weight?
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DB measures often emphasise form
• Procedures, time, cost
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Procedural Regulation
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Costs:
• Inefficiency, corruption
• Complexity fosters uncertainty
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Benefits:
• Enforcement, consistency, fairness
• Control of outcome
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Procedural regulation and outcomes
• Djankov et al. (2003, QJE)
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Behavioural Regulation
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Regulating the business environment:
• Environmental Law
• Competition Law
• Consumer Protection Law
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Costs  opportunities foregone
Benefits:
• complexity, clarity, externalities
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Procedural Regulation in DB
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Starting/closing a business
Dealing with licenses
Registering property - property rights?
Paying taxes - clarity, dispute resolution?
Trading across borders
• Protection, infrastructure?
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Enforcing contracts
• Success rate of appeals?
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Behavioural Regulation in DB
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Employing workers
• Difficulty of hiring/firing
• Rigidity of hours
• Nonwage labour cost
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Getting credit
• Strength of legal rights
• Depth of credit information
• Credit registry coverage
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Behavioural Regulation in DB (cont.)
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Protecting investors
• Extent of disclosure
• Extent of director liability
• Ease of shareholder suits
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Interpreting the DB Reports
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Cautious interpretation
• Specific cases measured
• Who is the regulator? What is their aim?
• Endogeneity:
Regulation ↔ Agent behaviour
• Measurement difficulty: sample selection bias
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Conclusion
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Worthwhile exercise
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Benchmarking  reform opportunities
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Methodological issues
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Interpret with caution
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