Legal Harmonization Seminar
Sessions 1 and 2: Legal Origins
Fernando Gomez Pomar
Universitat Pompeu Fabra, Barcelona
NYU School of Law
NYU School of Law, Fall term 2012
Main goals
• The basic motivation behind this seminar
is to understand how legal fragmentation
affects social and economic outcomes,
and what are the factors and mechanisms
that may work, and are actually used to,
bring legal systems closer together
• Obviously this does not mean that the
desirable end result is that all
jurisdictions have the same laws and
legal institutions
• This is not only implausible, it is also
undesirable (and not simply for the
lawyers!)
Main goals
• Legal harmonization may bring benefits,
but it may also entail significant costs
• Challenges and opposition to legal
approximation is not purely the outcome
of protectionist policies, nationalistic
tendencies, or interest group pressure, as
we will see
• To analyze systematically what are the
processes, and the benefits and costs of
legal harmonization, and to draw some
legal policy implications constitutes the
core of the course
Main goals
• The purpose is quite general, and is not
limited to a particular region of the world
or area of the Law
• We will, however, discuss some specific
applications, cases and areas of past and
present harmonization, mostly referred to
business law issues (contracts, corporate
law) and touching the European context
• We start by looking at the relevance of
the problem: Is the law and are the
differences in law so important?
Main goals
• Legal Origins and Economic Growth
– Understand the legal origins literature and its
implications
– Identify the possible shortcomings
– Set grounds for inquiry into legal fragmentation
and legal harmonization
Basic summary of this literature: La Porta et. al.,
“Economic Consequences of Legal Origins,”
Journal of Economic Literature (2008); SSRN:
http://papers.ssrn.com/sol3/papers.cfm?abstract
_id=1028081
Main goals
• This literature has produced significant
policy measures, essentially through
World Bank-led or inspired projects and
initiatives
• Public Policy Dimension
– www.doingbusiness.org
– http://info.worldbank.org/governance/wgi/index.a
sp
– http://worldjusticeproject.org/?q=rule-of-lawindex/index-2011
Law and Growth
•
Unsurprisingly, economic theory generally supports
the idea that good legal institutions (clear and valuepromoting rules, high quality courts) facilitate
economic growth
•
Economic growth crucially requires investment (of
effort, of capital) with non-immediate returns
These investments require:
– Rules that protect liberty, property and contract
•
– Good, independent courts who enforce contracts and liberty and
property, and by doing so encourage the investment which is
crucial for economic development
Law and Growth
•
Causation may work both sides: economic growth is
likely to increase demand for good legal rules and high
quality courts or other institutions to enforce them
•
In turn, improvements in the quality of the Law are
likely to facilitate increases in growth, which will
further increase demand for high-quality legal
infrastructure
•
The empirical literature provides some support for the
idea that a legal system of high quality encourages
economic growth, but the specific causal channels
remain unclear and much work is yet to be done
Legal origins literature
•
•
The legal origins literature, essentially stemming from
research of a limited group of scholars (LLSV and coauthors) is based upon the following foundations:
– Law and legal outcomes are measurable
– Legal systems can be ascribed to legal origins or legal
families that are markedly different
– Legal origins have a deep impact on the laws and legal
institutions of countries and these, in turn, produce
important effects in economic outcomes
Important “implications” according to this literature:
– Confirmation of efficiency hypothesis of the Common
Law
– Judge-made law is more efficient than statute law
– Common law courts are more effective in protecting from
government bad behavior than civil law courts
Legal origins literature
• Results from this literature on legal
origins:
– Common law is better than Civil law (with differences
between the Scandinavian, German and French origins,
the latter clearly the worst according to the legal origins
thesis)
– Regression analysis show the effects of legal origins on
important legal and economic variables both at

Micro level: financial markets, credit protection and
contract enforcement, entry of firms, government
ownership of banks and media labor markets, legal
formalism, etc.

Macro level: growth, development, rule of law, quality
of judiciary
Legal origins literature
• Results from this literature on legal
origins:
– For all the above variables, there is a clear and
significant positive effect of having a Common law legal
origin and a clear and significant negative effect of
having a Civil law, especially French, origin


Common Law origin is linked to more and better investor
and creditor protection, less government regulation, more
judicial independent and less formalistic and more creative
courts
Civil Law origin is linked to the reverse
– The basic paper cited above contains a summary of
regressions (Tables I, II, III) but just to give some
illustrative data
Total Private Issuances
Source: Bloomberg
Spain
Year
Equities
Corporate Bonds
Equities
Corporate Bonds
2008
0.81
0.4
174.51
2,468.11
2009
3.76
2.8
228.96
2,519.36
2010
3.89
10.01
183.28
2,650.41
2011
9.79
0.7
168.75
2,196.42
GDP 2011
Year 2011 / gdp 2011
Insert filename here
US
1,407.41
0.70%
14,582.40
0.05%
1.16%
15.06%
Date of presentation
13
Legal origins literature : whence the
results?
– Pro-market bias of the Common Law


Civil Law: policy implementing, socially
conditioned private contracting
Common law: dispute resolving, unconditioned
private contracting

Are we mixing the pro-big government bias of
French politics with French law?

Where is the historical origin of this legal/cultural
divide? The Thirteenth century? Codification
period? Twentieth century developments (think, for
instance, of different attitudes across EU Civil Law
countries concerning the role and power of courts)?
Legal origins literature : whence the
results?

Stability, slow and organic change of the Common
Law (Hayekian-type of argument)
– Are legislators or Courts more prone to rapid
change of rules?
– Does codification help or undermine stability?


Independent and powerful judiciary, resilient to
government and interest group pressure, and not
engaged in centralized bureaucratic control
Does choice of law play a role?
Legal origins literature : whence the
results?

Should not legal transplants play a role?
– Evidence of path dependence and lack of
convergence

Are legal systems so internally coherent?

Can legal systems be ascribed to a family in all
areas and respects?
Challenging the legal origins theory
• Several lines of arguments challenging
the legal origins thesis

Can Law and legal institutions be reliably
measured?
– How can you measure “constitutional acceptance
of case law”, for instance? Or even “contract
enforcement”?
– Is measuring “Law in the books” the same as
measuring “Law in action”?
– How can we measure the latter?
• Survey data
• Data on actual outcomes
Challenging the legal origins theory
• Several lines of arguments challenging
the legal origins thesis

One-size-fits-all critique:
– Legal systems are not monolithic, they do not
respond to Weberian “ideal types”
– Legal systems evolve over time in different ways
and subject to different influences
– Dimensions of legal institutions affecting legal and
economic outcomes are varied and have different
origins and bases
Challenging the legal origins theory
• Several lines of arguments challenging
the legal origins thesis

Static vision critique:
– Legal systems change significantly over time, but
effects on outcomes are determined at just one
moment, the present time
– Legal origins fails to identify what is the permanent
elements that have not evolved and are influencing
current outcomes
Challenging the legal origins theory

Alternative theories: the true explanatory variable
is not legal origin but some other one correlated
with the former
– Culture: prevailing cultural values and practices are
the true substance behind the differences in "legal
cultures". Different legal cultures are a by-product
of those other, deeper, cultural variations that
explain the economic outcomes
– Religion: closely linked to the cultural explanation
above, but with an emphasis on religion, and
religion-inspired social values and practices
Challenging the legal origins theory

Alternative theories
– Politics is the key explanatory variable behind the
identified diversified economic performance of
countries:
• Pro-government biases in given polities
• Influence of social democratic grand policies
deeply affecting the economy and the role of
government at certain moments
• Political views about the relationship between
political power and Law: Courts as political
actors; legal control of political power
Challenging the legal origins theory

Alternative theories
– History matters:
• Economic outcomes and performance changes
and even reverses over time: the debate
concerning financial market development in
early XXth century and the relative advantage
of Civil Law jurisdictions
• Dramatic historical events are overlooked (the
inter-wars period, WWII and its aftermath) that
had a profound impact on XX century policies
and economic outcomes
Main criticisms of the legal origins theory
– Disputing the evidence

Reasons to doubt the empirical and econometric
credibility of the analysis:
– Important problem with coding legal variables
• Most variables reflect Law in the Books
• Legal outcomes do not have exogenous
importance, but are endogenous to the type of
legal system (checks, formalities, etc.)
• Law in action variables may be systematically
biased
Main criticisms of the legal origins theory
– Disputing the evidence

Reasons to doubt the empirical and econometric
credibility of the analysis:
– Important problems with econometric specifications
[omitted variables, lack of robustness checks]
– More advanced econometric techniques do not
work: slow pace of legal change makes panel data
unusable; instrumental variables problematic due
to independent effects of instruments on economic
outcomes; high degree of correlation between
institutional variables
Main criticisms of the legal origins theory
– Disputing the evidence

Correlations found do not ensure causality

Results are too sensitive to specifications of the
econometric model: when multiple cultural
variables are added together, some of them are
significant, and produce lack of significance and
even produce a reversal of the sign of coefficients

The strength of the empirical support for legal
origins is more doubtful than it looks like
Main criticisms of the legal origins theory
– Disputing the theory

The theories in support of the efficiency of the
Common Law encounter important problems:
– Posner: Common Law judges having a preference
for efficiency
• No evidence of such a preference
– Priest: the asymmetric litigation rates of inefficient
and efficient rules
• Requires sufficient pressure from litigation and
certain initial conditions
Main criticisms of the legal origins theory
– Disputing the theory

The theories in support of the efficiency of the
Common Law encounter important problems:
– Gennaioli & Shleifer: complex evolutionary theories
in which the interplay between following precedent
and distinguishing and overruling may lead to
efficient outcomes
• The assumptions for the validity are very
exacting

Advantage of several Common Law countries,
especially US and Canada is fairly recent in the
entire history of legal families
Main criticisms of the legal origins theory
– Disputing the theory

Problems with the rent-seeking theory of the
advantage of judge-made Law

Problems to explain mixed jurisdictions that have
remained so:
– Intercolonial transfer (southern US, Quebec)
– International merger of systems (Scotland)
– Heavy transplants of core legal institutions
(Constitutions and courts in Latin America)
Importance of legal origins theory
– Despite criticisms, it is true that legal origins
theory

Has been deeply influential in academia and
public policy, and still is

It has opened new ground for a more quantitative
and comparativist analysis of legal rules, legal
institutions and legal outcomes

Has raised important questions about the
channels through which Law and legal institutions
affect societal and economic outcomes
Importance of legal origins theory
– Despite criticisms, it is true that legal origins
theory

Has placed Law and legal institutions (the Court
system especially, but not exclusively) at the core
of factors influencing economic growth and setting
strategies for development in less developed
countries

Law and legal institutions in Private Law
(contracts, corporations, capital markets,
property) do not only influence how corporate
actors behave, they are able to influence the life
and destiny of almost everyone in society
Importance of legal origins theory
– Despite criticisms, it is true that legal origins
theory

For our purposes, it has paved the way for making
the issues of legal diversity and legal
harmonization and approximation an area of
debate that affects not only the more “technical”
aspects of law, but also important social and
economic goals of countries

It has promoted the use of economic tools, both
theoretical and empirical, for understanding and
evaluating diversity of legal rules and institutions
and the ways in which diversity may be altered,
reduced and eventually eliminated