Daniel Berkowitz

Economic Development, Legality and the Transplant Effect

This paper analyzes the determinants of effective legal institutions (legality) and their impact on economic development today using data from 49 countries. We show that the way the law was initially transplanted and received is a more important determinant than the supply of law from a particular legal family (i.e. English, French, German, or Scandinavian). Countries that have developed legal orders internally, adapted the transplanted law to local conditions, and/or had a population that was already familiar with basic legal principles of the transplanted law have more effective legality than ”transplant effect” countries that received foreign law without any similar pre-dispositions. Controlling for the supply of legal families, we find that legality is roughly one third lower in transplant effect countries. While the transplant effect has no direct impact on economic development, it has a strong indirect effect via its impact on legality. The strong path dependence between economic development, legality and the transplant effect helps explain why legal technical assistance projects that focus primarily on improving the laws on the books frequently have so little impact. Finally, our statistical methodology produces a legality index based on observed legality proxies that almost fully captures their interaction with the way in which the law was transplanted, the supply of particular legal families and economic development. *We would like to than Jan Kleinheisterkamp (Max Planck Institute, Hamburg), for his help with background information on Latin America and the coding of these countries. We are also grateful to the comments of seminar participants at the World Bank and the University of Wisconsin-Madison.

Trade, Law, and Product Complexity

How does the quality of national institutions that enforce the rule of law influence international trade? Anderson and Marcouiller argue that bad institutions located in the importers country deter international trade because they enable economic predators to steal and extort rents at the importers border. We complement this research and show how good institutions located in the exporters country enhance international trade, in particular, trade in complex products whose characteristics are difficult to fully specify in a contract. We argue that both exporter and importer institutions affect international as well as domestic transaction costs in complex and simple product markets. International transaction costs are a part of the costs of trade. Domestic transaction costs affect complex and simple products differently, thereby changing a countrys comparative advantage in producing such goods.We find ample empirical evidence for these predictions: countries that have good institutions tend to export more complex products and import more simple products. Furthermore, institutions have a stronger influence on trade via production costs (comparative advantage) than through international transactions costs. International institutions seem to operate as substitutes for domestic institutions, because good domestic institutions are less important for promoting exports in those countries that have signed the New York Convention. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Russia's Internal Border

In integrated economies, inter-city-price differences can be explained largely by transportation costs. This is not the case in Russia. Here, we argue that this is due to an internal border that separates a region we denote as the Red Belt from the rest of Russia. Regions within the Red Belt exhibit high degrees of price dispersion and thus seem isolated. Moreover, these regions have been relatively slow to adopt economic reforms, and have suffered relatively low growth rates. The impact of the border on price dispersion is shown to be comparable to the impact of the U.S.-Canadian border.

Tax rights in transition economies: a tragedy of the commons?☆

Abstract This paper develops the concept of tax rights to analyze the impact of fiscal institutions on economic development in transition economies. A government’s tax rights are poorly defined when it and other governments and agencies can unilaterally levy taxes on the same tax base. Existing evidence suggests that Chinese local governments have gained more clearly defined tax rights than their Russian counterparts. Using the ‘big push’ model of industrialization [Murphy, K., Shleifer, A., Vishny, R., 1989. Industrialization and the big push. Journal of Political Economy 95, 1003–1026] within a common-property resource framework, we show that this difference in tax rights helps explain why China has been significantly more successful than Russia.

Policy reform and growth in post-Soviet Russia

In pursuit of its transition from a command to a market economy, Russia has witnessed enormous regional differences in economic growth rates. Moreover, the implementation of economic reforms has also differed markedly across regions. We analyze whether regional differences in reform policies can account for regional differences in growth rates, and conclude that to a considerable degree, they can. Most notably, we find that regional differences in price liberalization policies exhibit a positive direct correspondence with growth. We also find that regional differences in large-scale privatization exhibit a positive correspondence with the regional formation of new legal enterprises, which in turn exhibits a strong positive correspondence with growth.

The Effect of Judicial Independence on Courts: Evidence from the American States

This paper demonstrates that two initial conditions—having been settled by a country with a civil‐law legal system (France, Spain, or Mexico) and membership in the Confederacy during the Civil War—have had lasting effects on state courts in the United States. We find that states initially settled by civil‐law countries and states in the Confederacy granted less independence to their judiciary in 1970–90 and had lower‐quality courts in 2001–3. Furthermore, judicial independence is strongly associated with court quality. To explain these findings, we hypothesize that civil law acted through legislator preferences regarding the balance of power between the legislature and the judiciary, with legislators in civil‐law states preferring a more subordinate judiciary. The ability of civil‐law legislators to act on these preferences was, however, affected by within‐state political competition, which was much higher in northern states than in southern states after the Civil War.

The Validity of Instruments Revisited

This paper shows how valid inferences can be made when an instrumental variable does not perfectly satisfy the orthogonality condition. When there is a mild violation of the orthogonality condition, the Anderson and Rubin (1949) test is oversized. In order to correct this problem, the fractionally resampled Anderson–Rubin test is derived by modifying Wu’s (1990) resampling technique. We select half of the sample when resampling and obtain valid but conservative critical values. Simulations show that our technique performs well even with moderate to large violation of exogeneity when there is a finite sample correction for the block size choice.

Are “Nearly Exogenous Instruments” reliable?

We show that when instruments are nearly exogenous, the two stage least squares t-statistic unpredictably over-rejects or under-rejects the null hypothesis that the endogenous regressor is insignificant and Anderson-Rubin test over-rejects the null. We prove that in the limit these tests are no longer nuisance parameter free.

Regional integration: an empirical assessment of Russia

Abstract Using a statistical model of commodity trade, we quantify the evolution of regional economic integration within Russia during 1995–1999, and explore potential determinants of this evolution. Our integration measure exhibits rich regional variation that, when aggregated to the national level, fluctuates substantially over time. In accounting for this behavior, we draw in part on theoretical models that emphasize the potential role of openness to international trade and regional disparities in income in threatening economic integration. Controlling for a host of additional regional- and national-level variables, we find a strong negative correspondence between openness to international trade and internal economic integration.

The Evolution of Market Integration in Russia

We use a statistical model of commodity trade to measure the extent of integration between regional commodity markets within Russia. Monthly time-series data on regional commodity prices spanning 1994 through 1999 indicate substantial temporal fluctuations in integration over this period: an initial period of widespread integration gradually gave way to a period of disconnectedness in 1995 through 1997, which seems to have subsided by mid-1998. These temporal fluctuations exhibit strong statistical relationships with a host of aggregate variables; most notably, internal integration exhibits a strong negative relationship with international trade.