In this paper, we focus on the institutions required to support large capital markets and survey the empirical evidence on the link between legal institutions and financial markets. Specifically, we are interested in providing an answer to why we observe such large differences in the size, breadth and valuation of capital markets? Why, for example, are equity markets so much larger in South Africa than in Mexico or Peru? Why did many companies go public in India and Hong Kong in 1995, while no company went public in Brazil or Uruguay or Venezuela in the same year? Why do countries like New Zealand have large credit markets while Argentina and Colombia do not have them?
We present data on ownership structures of large corporations in 27 wealthy economies, making an effort to identify the ultimate controlling shareholders of these firms. We find that, except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to the Berle and Means image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions or other widely held corporations is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash flow rights, primarily through the use of pyramids and participation in management.
We investigate empirically the determinants of the quality of governments in a large cross-section of countries. We assess government performance using measures of government intervention, public sector efficiency, public good provision, size of government, and political freedom. We find that countries that are poor, close to the equator, ethnolinguistically heterogeneous, use French or socialist laws, or have high proportions of Catholics or Muslims exhibit inferior government performance. We also find that the larger governments tend to be the better performing ones. The importance of historical factors in explaining the variation in government performance across countries sheds light on the economic, political, and cultural theories of institutions.
We examine the effects of the interaction between lobbying and legislative bargaining on policy formation. Two systems are considered: a US–style congressional system and a European–style parliamentary system. First, we show that the policies generated are not intermediate between policies that would result from pure lobbying or from pure legislative bargaining. Second, we show that in congressional systems the resulting policies are strongly skewed in favor of the agenda–setter. In parliamentary systems they are skewed in favor of the coalition, but within the coalition there are many possible outcomes (there are multiple equilibria) with the agenda–setter having no particular advantage. Third, we show that equilibrium contributions are very small, despite the fact that lobbying has a marked effect on policies.
After the passage of two decades, the situation in Southeast Asia is quite different from what is written here. For one thing, ASEAN membership has increased from five in 1978 to nine, including Vietnam, the country the original members dreaded for so long. Many countries in the region have achieved remarkable economic development, well beyond their expectations in the 1970s, although they are presently beset by currency crises. Notwithstanding, I have decided to reprint the paper in a bound edition for limited distribution with a hope that it may serve as a reference, despite its outdatedness, to students of Southeast Asia, an analysis that an Asian journalist made of the region?s complex circumstances in the late 1970s. As I see it, many of the problems discussed in the paper, especially those involving the sociopolitical setting and leadership performance by power elites in a number of countries, still persist in various forms to hinder the further progress of each nation and the region as a whole. The paper?s text, including facts and figures, is same as the original, except for minor copyreading corrections.
A familiar question raised by the Federal Reserve System's evolving use of money growth targets over the past twenty years is whether monetary policymakers had sound economics reasons for changing their procedures as they did — either in adopting money growth targets in the first place, or in subsequently abandoning them, or in both instances. This paper addresses that question by comparing two kinds of evidence base on U.S. time–series data. The main conclusion from this comparison is that whatever economic conditions might have warranted reliance on money growth targets in the 1970s and early 1980s had long disappeared by the 1990s, so that abandoning these targets was an appropriate response to changing circumstances. Whether adopting money growth targets earlier on was likewise appropriate is less clear.
Over this quarter century the American economy experienced higher rates of participation in the labour force, especially by women, and a decline in the share of children in the population; a relative growth of non–wage income, especially but not exclusively pension income; and lower savings rates. Allowing for these factors implies an increase in the average real wage rate of nine percent, still way above the official figure.
North and Weingast (1989) argued that the English Glorious Revolution of 1688 redistributed political power in such a way as to enhance the enforcement of property rights. They supported their hypothesis by presenting evidence that interest rates fell and interpreted this as a fall in the risk premium demanded by lenders. I argue that one cannot test their theory in this way since it implicitly rests on the assumption that the risk of debt repudiation was exogenous. This was clearly not so. If lenders anticipated that the incentives of the Stuart monarchs to default depended on the interest rate, then instead of changing a risk premium, they ration credit. There is a fact much evidence that this was the case. In these circumstances a reduction in the desire, or the ability, of the monarch to default leads not to a fall in interest rates, but a relaxation of rationing. Thus the theory of North and Weingast is immune to the critique of Clark (1996) and is entirely consistent with the available evidence.
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