Tag Archives: institutions

Daniel Sokol on evolution, law, and institutions

Here is Daniel Sokol at the Conglomerate in 2008:

I believe that LLSV makes certain assumptions about history and political economy in legal origins that are not exactly supported by the underlying historical record.  A number of scholars have attacked LLSV on these grounds. Nevertheless, I still find myself strangely attracted to LLSV. In many ways, the results are what you would intuitively expect if you were on your own to attempt to rank countries based on investor protection or other similar features. More importantly, a number of the variables that LLSV uses are a bit squishy but we have yet to come up with better cross country measurements. Indeed, as a result of the critiques, LLSV have gotten better as to how they measure shareholder protection. From a policy perspective, the key to change to various bottlenecks requires not merely a top down approach in the change of the legal system but a bottom up approach by the users of these legal systems to overcome various bottlenecks that are regulatory. This makes me believe that over time the common law/civil law distinction will be seen as a rather false one where instead you will find countries lumped into categories based on their ability to respond to local and changing conditions (even the United States, which in recent years may have created increased regulatory bottlenecks such as SOX). This evolutionary approach is what I believe holds the key to understanding how to think about law and institutions.

LLSV refers to the seminal papers by La Porta, Lopez-de-Silanes, Schleifer, and Vishny in 1997 (Legal Determinants of External Finance) and 1998 (Law and Finance) which establish a thesis linking common, civil, and hybrid legal regimes to economics development and financial growth. The internal story has to do with the different kinds of investor protection that emerges under these regimes.

Sokol’s argument here resonates with me quite a bit and while it means that policy work that tries to draw conclusions of strict classification runs into some fairly tangible walls, I think the intuition that says that markets and institutions work together in complex and adaptive ways provides some rather good insights into where analytical work might be useful. I’ll be developing this in a post later this week so stay tuned…

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A Story of Revolution in Venezuela

Before Chavez there was Bolivar, before Bolivar there was Miranda, who is now known as El Precursor. Interestingly, the link is to the entry in the Encyclopedia Britannica, not Wikipedia (it is both jarringly strange and wonderful to me that Wikipedia has made the Encyclopedia Britannica irrelevant to me). This selection is from the excellent A Way In The World, a selection of autobiographical personal narrative by the Nobel Laureate V. S. Naipaul:

…Venezuela is a colony in the New World, with slave plantations, and it has all the divisions of that kind of place: Spaniards from Spain, who are the officials; a creole Spanish aristocracy; creole Spaniards who are not aristocracy; mulattos; the Negros of the plantations; the aboriginal Indians. This kind of place is held together only by a strong external authority. When that external authority goes, people can begin to feel they are sinking. Freedom for one group can mean slavery or oppression for another group.

So the Venezuelan revolution, as it progresses, deepens every racial and caste division in the country, encourages every kind of fear and jealousy; and the revolution begins to fail. The ordinary people of the country begin to go over to the other side, the side of old authority, and the reverences and law and religion they know.

Miranda appeals to the slaves to join him. They don’t listen; in fact, the slaves of Barlovento rebel, and there is a moment when it seems they might capture the capital, Caracas. And now, to buy peace, or at any rate to buy time, some of the very men who had called Miranda out from London, to lead their revolution, decide to hand him to the Spaniards. They wake him up one night and march him to the dungeon of a coastal fort.

There is some very interesting material here and many things to note. One is the sheer impact of Spanish colonialism, which as part of its economic and territorial imperialism has reshaped the human map of Venezuela in very vicious ways. I am curious about the evolutionary path of these kinds of coalitions and the strategic games they play and why particularly these coalitions aren’t able to mutually coordinate a revolution or (later stable non-authoritarian government).

The line of thought also plays out some interesting questions. It seems to me that bad governance is path-dependent and part of the story is that turmoil itself retards the formation and optimal evolution of institutions that make civil governance possible. If you have any thoughts of readings to point me further along this path please post them in the comments.

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