We exploit di®erences in early colonial experience to estimate the e®ect of institutions on economic performance. Our argument is that Europeans adopted very di®erent colonization policies in di®erent colonies, with di®erent associated institutions. The choice of colonization strategy was, at least in part, determined by the feasibility of whether Europeans could settle in the colony. In places where Europeans faced high mortality rates, they could not settle and they were more likely to set up worse (extractive) institutions. These early institutions persisted to the present. We document these hypotheses in the data. Exploiting di®erences in mortality rates faced by soldiers, bishops and sailors in the colonies during the 18th and 19th centuries as an instrument for current institutions, we estimate large e®ects of institutions on income per capita. Our estimates imply that a change from the worst (Zaire) to the best (US or New Zealand) institutions in our sample would be associated with a ¯ve fold increase in income per capita.

This paper evaluates (1) whether the exogenous component of financial intermediary development influences economic growth and (2) whether cross-country differences in legal and accounting systems (e.g., creditor rights, contract enforcement, and accounting standards) explain differences in the level of financial development. Using both traditional cross-section, instrumental variable procedures and recent dynamic panel techniques, we find that the exogenous components of financial intermediary development is positively associated with economic growth. Also, the data show that cross-country differences in legal and accounting systems help account for differences in financial development. Together, these findings suggest that legal and accounting reforms that strengthen creditor rights, contract enforcement, and accounting practices can boost financial development and accelerate economic growth.

The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. Acknowledgements: We would like to thank Anke Höffler for research assistance in section 2 and Chris Adam, Janine Aron, Kees Burger, Bill Kinsey, Remco Oostendorp, Ritva Reinikka, Francis Teal, Steve Younger and three referees for comments. Abstract: Africa has had slow growth and a massive exodus of capital. In many respects it has been the most capital-hostile region. We review and interpret the aggregate-level and microeconomic literatures to identify the key explanations for this performance. There is a reasonable correspondence of the two sets of evidence, pointing to four factors as being important. These are a lack of openness to international trade; a high-risk environment; a low level of social capital; and poor infrastructure. These problems are to a substantial extent attributable to government behaviour and the paper includes a review of the political economy literature which addresses that behaviour

This paper analyzes which of various plausible determinants are significantly related to an index of "perceived corruption" compiled from business risk surveys for the mid-1990s. Using 2SLS to reduce problems of endogeneity and a variation of Leamer's "extreme bounds analysis" to test for robustness, it finds three factors robustly significant. Countries that were more economically developed and those which are former British colonies were rated "less corrupt". Those which have a federal structure were "more corrupt". Daniel Treisman Assistant Professor Department of Political Science University of California, Los Angeles 4289 Bunche Hall LA CA 90095-1472 Treisman@polisci.ucla.edu First Draft September 1997 Revised April 1998 ####

This paper examines the relationship between the legal system and banking development and traces this connection through to long-run rates of per capita GDP growth, capital stock growth, and productivity growth. The data indicate that countries where the legal system (1) emphasizes creditor rights and (2) rigorously enforces contracts have better developed banks than countries where laws do not give a high priority to creditors and where enforcement is lax. Furthermore, the exogenous component of banking development -- the component defined by the legal environment -- is positively and robustly associated with per capita growth, physical capital accumulation, and productivity growth.

For over a century, economists and policy makers have debated the relative merits of bank-based versus market-based financial systems. Recently, however, proponents of the legal-based view of financial development have argued that the century long debate concerning bank-based versus market-based financial systems is analytically vacuous. According to this view, the critical issue is establishing a legal environment in which both banks and markets can operate effectively. This paper represents the first broad, cross-country examination of which view of financial structure and economic growth is most consistent with the data.

Using data from the Tanzania Social Capital and Poverty Survey (SCPS), a large scale survey which asked individuals about the extent and characteristics of their associational activity and their trust in various institutions and individuals, we construct a measure of “social capital ” in rural Tanzania. By matching this measure of social capital with data on household incomes in the same villages both from the SCPS and an earlier household survey, the Human Resources Development Survey (HRDS) we show that “social capital ” is indeed both capital, in that it raises incomes, and social, in that household outcomes depend on village not just household social capital. The magnitude of social capital’s effect on incomes is impressively large: a one standard deviation increase in village social capital increases household expenditures per person (a proxy for income) by at least 20 to 30 percent. This impact is as large as an equivalent increase in non-farming assets or tripling the level of education. The data from the two surveys also allow the identification of some of the proximate channels through which social capital affects incomes: better publicly provided services, greater use of modern agricultural inputs, more community activity, and greater use of credit in agriculture. The findings, interpretations, and conclusions expressed and in this paper are entirely those of the authors. They do not necessarily reflect the views of the World Bank, its Executive Directors, or the countries they represent. 1

Both individual experiences and community characteristics influence how much people trust each other. Using individual level data drawn from US localities we find that the strongest factors associated with low trust are: (i) a recent history of traumatic experiences; (ii) belonging to a group that historically felt discriminated against, such as minorities (blacks in particular) and, to a lesser extent, women; (iii) being economically unsuccessful in terms of income and education; (iv) living in a racially mixed community and/or in one with a high degree of income disparity. Religious beliefs and ethnic origins do not significantly affect trust. The role of racial cleavages leading to low trust is confirmed when we explicitly account for individual preferences on inter racial relationships: within the same community, individuals who express stronger feelings against racial integration trust relatively less the more racially heterogeneous the community is.

Abstract not found

This paper draws on our new database on bank regulation and supervision in 107 countries to assess different governmental approaches to bank regulation and supervision and to evaluate the efficacy of specific regulatory and supervisory policies. First, we assess two broad and competing theories of government regulation: the helping-hand approach, according to which governments regulate to correct market failures, and the grabbing-hand approach, according to which governments regulate to support political constituencies. Second, we assess the impact of an extensive array of specific regulatory and supervisory practices on banking-sector development and fragility. These policies include regulations on bank activities and the mixing of banking and commerce; regulations on domestic and foreign bank entry; regulations on capital adequacy; deposit insurance system design features; supervisory power, independence, resources, loan classification stringency, provisioning standards, diversification guidelines, and prompt corrective action powers; regulations on information disclosure and fostering private-sector monitoring of banks; and government ownership of banks. The results raise a cautionary flag regarding reform strategies that place excessive reliance on country's adhering to an extensive checklist of regulatory and supervisory practices that involve direct government oversight of and restrictions on banks. The findings, which are much more consistent with the grabbing- hand view than the helping-hand view of regulation, suggest that regulatory and supervisory practices that (1) force accurate information disclosure, (2) empower private-sector corporate control of banks, and (3) foster incentives for private agents to exert corporate control work best to promote bank perf...