Why are Malaysians wealthier than Indonesians?
Some say it may be, in part, because Malaysian law is based on English common law, while Indonesian law is based on Dutch, and ultimately French, civil law.
Nicholas Thompson explains in the LegalAffairs article: "Common Denominator" .
- "LLSV's ["LLSV" refers to the authors - "Rafael La Porta of Dartmouth's Tuck School of Business, Florencio Lopez-de-Silanes of the Yale School of Management, Andrei Shleifer of Harvard's economics department, and Robert Vishny of the University of Chicago's business school." who jointly developed the argument - Ben] main tool was regression analysis, a mathematical technique in which many variables are plugged into a program that sorts out which ones are correlated and which ones are not. Using regression analysis, for example, you could plug in the heights, weights, and eye colors of 100 people. The results would show that height and weight are correlated (the taller you are, the more you're likely to weigh) but that weight and eye color are not.
Using this tool, "Law and Finance" [the 1998 article in the Journal of Political Economy that set out the original results - Ben] showed that common law countries protect both shareholders and creditors better than civil law countries do, and they also tend to be less corrupt. LLSV took dozens of specific financial indicators�ranging from key gauges, like the odds that a company's assets will be confiscated by the state, to smaller measures, like whether shareholders can vote at company meetings�and regressed them all against legal origin. The regressions showed that the measures that indicate high investor and creditor protection or low corruption connect to common law origin, just as height connects to weight. The measures that represent low protection and high corruption connect to civil law origin.
The regression didn't show that common law necessarily makes people richer, but it did represent a crucial link in a chain of logic that could connect legal origin to prosperity. When shareholders have more rights, people are more likely to invest in markets, because they have more protections against dishonest executives. When creditors have more rights, they are more likely to lend money, which spurs markets to grow. And when countries are free from corruption, investors put more money into them. The LLSV scholars weren't the first to recognize that shareholder and creditor rights spur economic growth, or that corruption stunts it, but they were the first to connect these conditions to a country's legal system and to do so using cold, hard numbers.
There's nothing in the common law per se that significantly protects shareholders�common law doesn't come with a shareholder's bill of rights. Nor is there a mandate for corruption embedded in civil law. "Law and Finance," then, raised as big a question as the one it claimed to answer: Why is a country's legal system so powerful a factor in determining its economic development?
In subsequent papers, LLSV has set out to solve that mystery. The most compelling theory they've developed has to do with the power both systems afford their judiciaries. Common law judges are, on balance, far more powerful than their counterparts in civil law countries. Since judges tend to be a country's most reliable check on the other parts of its government, common law countries grant less power to their executives than civil law countries do. And in developing nations, corruption is generally perpetuated from the top.
The difference in the power that the two systems grant their judges is rooted in their respective histories. French civil law derives from the Napoleonic code, published in 1804 by scholars eager to wrest power from the judiciary. Before the country's revolution, France's courts had earned reputations for elitism and corruption. Influenced by popular discontent with much of the judiciary, Napoleon attempted to write a statutory code that was essentially judge-proof. Judges draw their influence from their power to interpret laws. Napoleon's code stripped them of this prerogative; his code favored the writing of a new law over a judge's interpretation of an old one. Consequently, compared to common law countries, civil law countries have weak judiciaries�and long statute books."
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