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Adversary activities and per capita income growth
World Development, Vol. 14, No. 12, pp. 1457-1461, Printed in Great Britain.
1986.
0305-750X/86
$3.00 + 0.00
Pergamon Journals Ltd.
Adversary Activities and Per Capita Income Growth SAMAR
K. DA-I-I-A and JEFFREY B. NUGENT*
University of Southern California, Los Angeles
Summary. When some present or future markets are either imperfect or incomplete, the selfish motivations of individual agents may (but not necessarily) lead to rent-seeking activities that can make society worse off. Legal activities tend to raise the costs of doing business. Moreover, because they are biased in the direction of suits by firms and consumers against other firms, they may as a whole lower profit and hence both investment and growth rates relative to what they would be without such activities. This paper uses international cross-section data to provide a simple test of this hypothesis. Despite the crudeness of the test, the small size of the sample and possible ambiguities in interpretation, the results provide a tentative confirmation of the hypothesis.
In recent years growing attention has been devoted to the role of institutional factors in explaining variations in growth rates among nations. Much of this attention has focused on labor-management relations, governmentbusiness practices and the role of government. In particular, Olson (1982), Murrell (1982; 1983) and others have called attention to the role of special interest groups and especially labor unions in explaining the overall rate of growth.’ At the same time North (1981) has cited numerous historical examples where variations in the ability of economic institutions to control transaction costs and adversary activities have affected the level and rate of economic growth. Hayami and Kikuchi (1981) have demonstrated the relevance of such considerations to agricultural growth. The purpose of this note is to propose and provide a very simple test of a special version of the transaction costs theory of economic growth. Specifically, it is argued that the rate of economic growth will be inversely related to the relative importance of adversary relationships. The more resources that must be devoted to adversary relationships, the smaller the quantity of resources that will be available for capital formation and economic growth, and the less efficient will be any given amount of resource accumulation. While recourse to legal action can be a powerful instrument on the side of human liberty 1457
and economic efficiency, despite occasional pleas for reform from legal authorities in the US and other developed countries,’ it can also be one which absorbs and hence diverts prodigious quantities of economic resources away from growth-enhancing activities.3 While it could be argued that the diversion of such resources would represent only a static once-and-for-all social loss, akin to the static deadweight loss triangles attributable to monopoly, excise taxes, tariffs and the like which lower income but not the growth of income, we suggest’that it is the rate of growth which would be adversely affected. This may be expected for two important reasons. First, given the general scarcity of innovative and entrepreneurial talent, the high pecuniary return to legal resources has the effect of diverting such talent from creative and innovative, positive-sum-game activities. which have the effect of continually pushing the productive frontier outward over time, to zeroor even negative-sum-game activities which might even cause that frontier to be pulled
*The authors express their gratitude to Bernard Peh for his research assistance, to Mancur Olson and Takahiro Miyao for encouragement and to Timur Kuran, Peter Gordon, Frank Easterbrook. Takahiro Miyao. Mustapha Nabli and two anonymous referees for comments.
1458
WORLD DEVELOPMENT
inward over time. Second, given the understandable bias in legal systems in favor of suing parties with the ability to pay handsomely, and in particular the most profitable firms, legal activities may have the effect of reducing profits and hence savings and investment rates relative to what they would be without such activities4 Hence, just as the phenomenon of “crossinefficiency” has been alleged to reduce the rate of growth, so too transaction costs may be expected to lower, not merely the level of income, but also the growth rate of income. As a convenient and relatively widely available measure of the relative importance of transaction costs and adversary relationships, we use the number of lawyers (including both barristers and solicitors in British terminology) as a percentage of the total labor force. The measure is certainly not without its shortcomings.5 First, the measure for each country is based on memberships in the various bar associations in that country as opposed to those who are actually trained or working as lawyers.6 Second, what lawyers do and the function of the legal system may vary considerably from country to country and over time. By no means, is what lawyers do necessarily of no social value. Indeed, in some cases what lawyers do is to reduce transaction costs rather than to increase them as suggested here.’ Refinements in the measure would certainly be desirable. For example, it would be desirable to weigh the number of lawyers by their average income and to relate such income to aggregate personal income so as to measure the relative importance of the lawyers in the overall human capital stock of the country. It also might be desirable to distinguish between different types of lawyers, e.g., criminal lawyers, antitrust lawyers and so on.’ Furthermore, even if the measure were considered perfectly appropriate, its effect on growth is by no means free of ambiguity. For example, the relative importance of lawyers could be considered desirable because it would represent “voice” (as opposed to “exit”) in Hirschmanian terms9 which can sometimes have desirable effects on the efficiency of resource allocation and growth. Also the effect of the transaction cost variable on growth might be expected to vary according to the type of country and its level of development. Nevertheless, since in its simple form the measure is available on a relatively comparable basis for a relatively large number of countries and yet the income and other data necessary for the refinements are not generally available, the measure is used only in its simple form. Furthermore, considering the preliminary and suggestive nature of the proposed test, the test consists of
simply regressing the rate of growth of per capita GNP between 1960 and 1980 (RYCAP) on the share of lawyers in the labor force (PLAW). We also test the sensitivity of such results to the introduction of other variables frequently used in explaining variations in growth rates across countries, such as the growth rates of exports and investment (REXP and RINV),“’ or alternatively the shares of exports and investment in GNP (EXPS and INVS), and life expectancy (LIFE) as a proxy for the rate of return on human capital. The results for the sample of 52 countries for which such data is available, along with descriptive statistics, sources of data and the sample, are given in Table 1. As shown in the descriptive statistics, the share of lawyers in the labor force varies from a low of 0.0003% (for Taiwan) to 0.69% (for Iceland). Other countries with high shares are the United States, Israel, Argentina, Finland, Canada, Spain, Uruguay, Cyprus and United Kingdom. Other countries at the low end of the scale are Korea and Japan. As shown in the regression results, the coefficient of PLAW is negative and significant at the 5% level (in single-tailed tests) in all specifications. In general, the multiple regression results tend to be considerably stronger than those obtained from the simple regressions. By rerunning each of these regressions with one country at a time eliminated, it was found that in the case of the four countries with the most extreme values of PLAW, i.e., Iceland, Korea, Japan and Taiwan, the significance of the coefficient of PLAW in equation (1) is reduced below the 5% level. In none of these cases, however, is the reduction in significance level anything more than marginal. Moreover, when equations (2) and/or (3) are used, in none of these cases is the significance of PLAW reduced below the 5% level after the other relevant explanatory variables are accounted for. Contrary to what was the outcome of Pryor’s (1983) critique of Olson, when the level of per capita income in 1960 was added as an explanatory variable, the reduction in the absolute value and significance of the coefficient of PLAW turned out to be only marginal in regression equations (1) and (3). Moreover, in the preferred equation, regression equation (2), there was a marginal increase in the absolute value and significance of the coefficient of PLAW when the level of per capita income in 1960 was added. Therefore, we can conclude that the results are not particularly sensitive to alternative s ecifications or to slight changes in the sample. I: We do not wish to imply that the results would necessarily be robust for others among the
ADVERSARY Table
ACTIVITIES
AND PER CAPITA
1459
INCOME GROWTH
1. Descriptive statistics and regression rcsuits: variations in growth rates of per capita income among 52 countries* lw80
Regressions
results Coefficients
Equation number (I)RYCAP= (2) RYCAP = (3) RYCAP =
lntcrccpt 0.65 (1.60) -0.81 (0.73) 1.25 (0.91)
Descriptive statistics RYCAP Minimum Maximum Mean
(RYCAP)
-1.0 7.5 3.5
PLA W
LIFE
-3.08 (I.%) -3.72 (2.21)
-4.76 (2.13)
PLAW 0.0003 0.6907 0.16
of right hand side variables
REXP
RINV
EXPS
INVS
R’
0.07 (I.06
0.03x
0.13s
(3.21)
(2.17)
(4.45)
0.51
0.03 (1.01)
O.Olll (0.70)
0.036 (I .02)
LIFE
REXP
RINV
EXPS
INVS
3x.0 73.5 S6.2
0.82 30.72 6.62
0.46 44.00 6.46
5.82 130.76 37.52
4.95 39.95 21.47
0.15
Definitions of variables RYCAP = rate of growth of GNP per capita at constant prices 196tk80 PLAW = number of lawyers as percent of labor force LIFE = life expectancy at birth ca 1970 REXP = average annual rate of growth of exports at constant prices, 196fHO RINV = average annual rate of growth of investments at constant prices, 1960-80 EXPS = share of exports in GDP (1960-70 average) INVS = share of real investments in GDP (196&70 average) Data sources: Lawyers: American Bar Foundation, fnternational Directory of Ear Associations (Chicago, 4th edn, 1983); GNP per capita, GDP, investment and exports: United Nations, Handbook of World Development Statistics (New York, 1982); life expectancy: United Nations Demographic Yearbook (1965; 1968; 1970) and World Bank World Development Report (1982; 1983); Taiwain: Statistical Yearbook of the Republic of China (1982).
*Countries in sample: Algeria, Argentina, Australia, Austria, Barbados, Brazil, Canada, Costa Rica, Cyprus. Denmark, Dominican Republic, Ecuador, Fiji, Finland, France, Germany, Ghana, Guyana, Hong Kong, Iceland, India, Ireland, Israel, Italy, Japan, Jordan, Kenya, Korea, Lesotho, Luxembourg, Malaysia, Mexico, Nepal, Netherlands, New Zealand, Nigeria, Norway, Pakistan, Panama, Papua-New Guinea, Philippines, Singapore, South Africa, Spain, Switzerland. Taiwan, Trinidad, Turkey, United Kingdom, United States, Uruguay, Zambia.
numerous other specifications that could be suggested. The results may also be rather sensitive to the choice of countries included in the sample. Indeed, we would be surprised if someone could not come up with a specification and/or sample which might even support the opposite conclusion. Notably also, the results do not allow us to distinguish between our own explanation and two alternative explanations for the observed relationship between the rate of growth of income and the percent of lawyers in the labor force (PLAW), namely (1) that it is the change in PLAW (not the level of PLAW) which reduces the rate of growthi and (2) that the causality is the other way around, i.e., that it is easier to resolve conflicts and hence to kee PLAW down, the higher is the rate of growth.’ P Therefore, the preliminary character of these results needs to be
underscored. The results, however, provide at least very tentative support for the hypothesis that, the higher are the percentages of the labor force induced to enter the legal profession, whose activities, on balance, may be of the rent-seeking and zero-sum-game variety, the lower may be the overall rate of per capita income growth. Despite the admittedly tentative nature of the result, the following interpretation is suggested. In the absence of appropriate guiding principles (which the market can provide only in an Arrow-Debreu world in which there is a complete set of perfect markets), three different vehicles may be identified for how and why the selfish motivations of individual agents may lead such agents into rent-seeking activities which make society worse off (especially in the future as a result of slower growth) than it would be
1460
WORLD DEVELOPMENT
without them. First, given the existing rules and laws, some lawyers (“ambulance chasers,” for example) may try to create or at least to exaggerate existing differences among different parties in order to generate more rents for themselves. Second, other lawyers (politicians, lobbyists and administrators) may either dehberately or inadvertently create restrictive or ambiguous rules and laws that have the effect of generating more rents. Third, since lawyers are by and large among the most intelligent members of society, their diversion from normal and especially from growth-enhancing economic activities, has the effect of reducing both the level of aggregate output and its rate of growth. Notably, just as Krueger (1974) demonstrated with respect to import licenses, the imposition of monopolistic restrictions on entry, such as those on the number of seats in law schools, the enforcement
of high standards on bar examinations and the licensing of law schools, may be beneficial in that such restrictions could reduce the quantity of human capital resources going into rent-seeking, growth-reducing activities. Alternatively, however, such restrictions might simply have the effect of pushing the costs of rent-seeking to a different level, as for example in more courses designed to raise the applicant’s scores on the aptitude test, bar examination or any other measure designed to restrict entry. The results of this paper suggest that societies which find ways of reducing the number of highly people that are needed for resolving qualified
conflicts, thereby allowing people to concentrate on economically productive activities, may be better able to enjoy more rapid economic growth than societies which are not able to do so.
NOTES 1. For evidence see Pryor (1983). Choi (1983a) and the other papers in Mueller (1983). 2. Among those to have made such pleas in the US in recent years are Chief Justice Warren Burger, Justice Sandra Day O’Connor and several former Law School deans such as Derek Bok, now President of Harvard University. 3. The reasons for the diversion of such resources are of course the high pecuniary returns and also non-pecuniary rewards (prestige and political power) that are associated with the legal profession. Therefore, the phenomenon can be interpreted as resulting from rent-seeking behavior. 4. Since firms could and presumably do cover such costs by raising prices, this is certainly not a necessary outcome. To the extent, however, that smaller, less profitable firms in the same industry are less affected by such legal activities, their prices need not rise, making it difficult for litigation-prone firms to fully offset such costs with higher prices for the goods and services they produce. 5. A somewhat similar measure has been used by Pashigian, e.g., Pashigian (1982) although in a quite different context. 6. Since in many cases membership in a bar association is a requirement for practicing law and, even when such membership is voluntary, it is almost universal, this shortcoming does not seem great. Some upward or downward biases are nevertheless quite possible. Where multiple memberships are common there may be some overestimation of numbers of lawyers. On the other hand, underestimation may arise to the extent that there are paralegal personnel who serve the functions of lawyers even though they are not
eligible for membership in bar associations. Until very recently, however, the latter_ phenomenon does not seem to have been important anywhere. Note, however, the dissenting view offered by Tsubota (1984). 7.
For example,
to the extent
that lawyers are
involved in reducing crime, in promoting the rule of law and the use of rules in settling actual or potential disputes both after they arise or more importantly before they arise and in taking the ambiguity and hence the potential sources of conflict out of contractual arrangements, their effect would be to reduce transactions costs and to encourage growth and development. By and large, however, these roles are relatively minor. 8. For such a suggestion (1980). 9.
See Hirschman
see Nakagawa and Ota
(1970).
10. The inclusion of RINV and REXP in the same equation as RYCAP implies that the regression coefficients of those variables and the value of RZ are biased upward because of the inclusion of both investment and exports in the definition of aggregate income. While this bias could be eliminated by excluding these components from the definition of the left hand side variable, because the effects of the PLAW variable on which the test results are focused could well extend to these components in the present context their elimination would not be appropriate. Therefore, no such adjustment is carried out. 11. In this respect than those obtained variations in growth robustness in such (1982, Chap. 4).
the results are much more robust in several other studies explaining rates across countries. The lack of studies was pointed out by Olsen
ADVERSARY
ACfIVlTIES
AND
12. This alternative hypothesis cannot bc rcjwlctl because PLAW is mcasurcd at or near the end of lhc
PER
CAPITA
INCOME
GROWTH
1461
13. This possibility, suggested by Williamson (1975, Chap. 7), WiiS pointed out to us by Takahiro Miyao.
period in question and because it is quite likely lhat the high values of PLAW in countries included in the sample arc of relatively recent origin.
REFERENCES Choi, Kwang, “A statistical test of the political economy of comparative growth rates model,” in Mueller (1983a). Choi, Kwang, A Study of Compuuiive Ru~a\ o] Economic Grow/h (Ames: Iowa State University Press, lYH3b). Hayami, Yujiro, and Masao Kikuchi, Asicm Villuge Economy al the Crossroads (Baltimore: Johns Ilopkins University Press, 1981). Hirschman, Albert 0.. Exit, Voice and Loyully (CamPress, 1970). bridge: Harvard University of the Krueger, Anne O., “The political economy rent-seeking society,” American Economic Review, Vol. 64 (June 1974) pp. 291-303. Mueller, D. C. (Ed.), The Political Economy of Growth (New Haven: Yale University Press, 1983). Murrell, Peter, “The comparative structure of growth in the major developed capitalist nations,” Sour/tern Economic Journal, Vol. 48, No. 4 (April 1982), pp. 985-995. Murrell, Peter, “The comparative structure of West German and British manufacturing industry,” in Mueller (1983).
Nakagawa. Yatsuhiro. and Nobumasa Ota. “The Japanese-style economic system,” in Masao Baba and Kimihiro Masamura (Eds.). Irrdustricd Socic/j Chikuma Shobo. 1980). und the Jupanese (Tokyo: North, Douglass C., Srnrcmre a,rd Change irl Economic History (New York: W. W. Norton, 1981). Olson, Mancur. The Rise and Decline of Nariotu’ Economic Growth. Stugjlarion arrd So&l Rigidities Yale University Press. (New Haven and London: 1982). Pashigian, B. Peter, “Regulation, preventive law and the duties of attorneys.” in W. Carney (Ed.), The Changing Role of the Corporale Aftorney (Lexington, MA: D. C. Heath. 1982). pp. 3-46. Pryor, Frederic L., “A quasi-test of Olson’s hypotheses,” in Mueller (1983). Tsubota, Junjiro, “Myth and truth on non-litigiousness in Japan,” University of Chicago Law School Record, Vol. 8, No. 30 (1984). Williamson, Oliver E., Markets and Hierarchies Anafysti and Antitrust Implications (New York: Free Press, 1975).
1986.
0305-750X/86
$3.00 + 0.00
Pergamon Journals Ltd.
Adversary Activities and Per Capita Income Growth SAMAR
K. DA-I-I-A and JEFFREY B. NUGENT*
University of Southern California, Los Angeles
Summary. When some present or future markets are either imperfect or incomplete, the selfish motivations of individual agents may (but not necessarily) lead to rent-seeking activities that can make society worse off. Legal activities tend to raise the costs of doing business. Moreover, because they are biased in the direction of suits by firms and consumers against other firms, they may as a whole lower profit and hence both investment and growth rates relative to what they would be without such activities. This paper uses international cross-section data to provide a simple test of this hypothesis. Despite the crudeness of the test, the small size of the sample and possible ambiguities in interpretation, the results provide a tentative confirmation of the hypothesis.
In recent years growing attention has been devoted to the role of institutional factors in explaining variations in growth rates among nations. Much of this attention has focused on labor-management relations, governmentbusiness practices and the role of government. In particular, Olson (1982), Murrell (1982; 1983) and others have called attention to the role of special interest groups and especially labor unions in explaining the overall rate of growth.’ At the same time North (1981) has cited numerous historical examples where variations in the ability of economic institutions to control transaction costs and adversary activities have affected the level and rate of economic growth. Hayami and Kikuchi (1981) have demonstrated the relevance of such considerations to agricultural growth. The purpose of this note is to propose and provide a very simple test of a special version of the transaction costs theory of economic growth. Specifically, it is argued that the rate of economic growth will be inversely related to the relative importance of adversary relationships. The more resources that must be devoted to adversary relationships, the smaller the quantity of resources that will be available for capital formation and economic growth, and the less efficient will be any given amount of resource accumulation. While recourse to legal action can be a powerful instrument on the side of human liberty 1457
and economic efficiency, despite occasional pleas for reform from legal authorities in the US and other developed countries,’ it can also be one which absorbs and hence diverts prodigious quantities of economic resources away from growth-enhancing activities.3 While it could be argued that the diversion of such resources would represent only a static once-and-for-all social loss, akin to the static deadweight loss triangles attributable to monopoly, excise taxes, tariffs and the like which lower income but not the growth of income, we suggest’that it is the rate of growth which would be adversely affected. This may be expected for two important reasons. First, given the general scarcity of innovative and entrepreneurial talent, the high pecuniary return to legal resources has the effect of diverting such talent from creative and innovative, positive-sum-game activities. which have the effect of continually pushing the productive frontier outward over time, to zeroor even negative-sum-game activities which might even cause that frontier to be pulled
*The authors express their gratitude to Bernard Peh for his research assistance, to Mancur Olson and Takahiro Miyao for encouragement and to Timur Kuran, Peter Gordon, Frank Easterbrook. Takahiro Miyao. Mustapha Nabli and two anonymous referees for comments.
1458
WORLD DEVELOPMENT
inward over time. Second, given the understandable bias in legal systems in favor of suing parties with the ability to pay handsomely, and in particular the most profitable firms, legal activities may have the effect of reducing profits and hence savings and investment rates relative to what they would be without such activities4 Hence, just as the phenomenon of “crossinefficiency” has been alleged to reduce the rate of growth, so too transaction costs may be expected to lower, not merely the level of income, but also the growth rate of income. As a convenient and relatively widely available measure of the relative importance of transaction costs and adversary relationships, we use the number of lawyers (including both barristers and solicitors in British terminology) as a percentage of the total labor force. The measure is certainly not without its shortcomings.5 First, the measure for each country is based on memberships in the various bar associations in that country as opposed to those who are actually trained or working as lawyers.6 Second, what lawyers do and the function of the legal system may vary considerably from country to country and over time. By no means, is what lawyers do necessarily of no social value. Indeed, in some cases what lawyers do is to reduce transaction costs rather than to increase them as suggested here.’ Refinements in the measure would certainly be desirable. For example, it would be desirable to weigh the number of lawyers by their average income and to relate such income to aggregate personal income so as to measure the relative importance of the lawyers in the overall human capital stock of the country. It also might be desirable to distinguish between different types of lawyers, e.g., criminal lawyers, antitrust lawyers and so on.’ Furthermore, even if the measure were considered perfectly appropriate, its effect on growth is by no means free of ambiguity. For example, the relative importance of lawyers could be considered desirable because it would represent “voice” (as opposed to “exit”) in Hirschmanian terms9 which can sometimes have desirable effects on the efficiency of resource allocation and growth. Also the effect of the transaction cost variable on growth might be expected to vary according to the type of country and its level of development. Nevertheless, since in its simple form the measure is available on a relatively comparable basis for a relatively large number of countries and yet the income and other data necessary for the refinements are not generally available, the measure is used only in its simple form. Furthermore, considering the preliminary and suggestive nature of the proposed test, the test consists of
simply regressing the rate of growth of per capita GNP between 1960 and 1980 (RYCAP) on the share of lawyers in the labor force (PLAW). We also test the sensitivity of such results to the introduction of other variables frequently used in explaining variations in growth rates across countries, such as the growth rates of exports and investment (REXP and RINV),“’ or alternatively the shares of exports and investment in GNP (EXPS and INVS), and life expectancy (LIFE) as a proxy for the rate of return on human capital. The results for the sample of 52 countries for which such data is available, along with descriptive statistics, sources of data and the sample, are given in Table 1. As shown in the descriptive statistics, the share of lawyers in the labor force varies from a low of 0.0003% (for Taiwan) to 0.69% (for Iceland). Other countries with high shares are the United States, Israel, Argentina, Finland, Canada, Spain, Uruguay, Cyprus and United Kingdom. Other countries at the low end of the scale are Korea and Japan. As shown in the regression results, the coefficient of PLAW is negative and significant at the 5% level (in single-tailed tests) in all specifications. In general, the multiple regression results tend to be considerably stronger than those obtained from the simple regressions. By rerunning each of these regressions with one country at a time eliminated, it was found that in the case of the four countries with the most extreme values of PLAW, i.e., Iceland, Korea, Japan and Taiwan, the significance of the coefficient of PLAW in equation (1) is reduced below the 5% level. In none of these cases, however, is the reduction in significance level anything more than marginal. Moreover, when equations (2) and/or (3) are used, in none of these cases is the significance of PLAW reduced below the 5% level after the other relevant explanatory variables are accounted for. Contrary to what was the outcome of Pryor’s (1983) critique of Olson, when the level of per capita income in 1960 was added as an explanatory variable, the reduction in the absolute value and significance of the coefficient of PLAW turned out to be only marginal in regression equations (1) and (3). Moreover, in the preferred equation, regression equation (2), there was a marginal increase in the absolute value and significance of the coefficient of PLAW when the level of per capita income in 1960 was added. Therefore, we can conclude that the results are not particularly sensitive to alternative s ecifications or to slight changes in the sample. I: We do not wish to imply that the results would necessarily be robust for others among the
ADVERSARY Table
ACTIVITIES
AND PER CAPITA
1459
INCOME GROWTH
1. Descriptive statistics and regression rcsuits: variations in growth rates of per capita income among 52 countries* lw80
Regressions
results Coefficients
Equation number (I)RYCAP= (2) RYCAP = (3) RYCAP =
lntcrccpt 0.65 (1.60) -0.81 (0.73) 1.25 (0.91)
Descriptive statistics RYCAP Minimum Maximum Mean
(RYCAP)
-1.0 7.5 3.5
PLA W
LIFE
-3.08 (I.%) -3.72 (2.21)
-4.76 (2.13)
PLAW 0.0003 0.6907 0.16
of right hand side variables
REXP
RINV
EXPS
INVS
R’
0.07 (I.06
0.03x
0.13s
(3.21)
(2.17)
(4.45)
0.51
0.03 (1.01)
O.Olll (0.70)
0.036 (I .02)
LIFE
REXP
RINV
EXPS
INVS
3x.0 73.5 S6.2
0.82 30.72 6.62
0.46 44.00 6.46
5.82 130.76 37.52
4.95 39.95 21.47
0.15
Definitions of variables RYCAP = rate of growth of GNP per capita at constant prices 196tk80 PLAW = number of lawyers as percent of labor force LIFE = life expectancy at birth ca 1970 REXP = average annual rate of growth of exports at constant prices, 196fHO RINV = average annual rate of growth of investments at constant prices, 1960-80 EXPS = share of exports in GDP (1960-70 average) INVS = share of real investments in GDP (196&70 average) Data sources: Lawyers: American Bar Foundation, fnternational Directory of Ear Associations (Chicago, 4th edn, 1983); GNP per capita, GDP, investment and exports: United Nations, Handbook of World Development Statistics (New York, 1982); life expectancy: United Nations Demographic Yearbook (1965; 1968; 1970) and World Bank World Development Report (1982; 1983); Taiwain: Statistical Yearbook of the Republic of China (1982).
*Countries in sample: Algeria, Argentina, Australia, Austria, Barbados, Brazil, Canada, Costa Rica, Cyprus. Denmark, Dominican Republic, Ecuador, Fiji, Finland, France, Germany, Ghana, Guyana, Hong Kong, Iceland, India, Ireland, Israel, Italy, Japan, Jordan, Kenya, Korea, Lesotho, Luxembourg, Malaysia, Mexico, Nepal, Netherlands, New Zealand, Nigeria, Norway, Pakistan, Panama, Papua-New Guinea, Philippines, Singapore, South Africa, Spain, Switzerland. Taiwan, Trinidad, Turkey, United Kingdom, United States, Uruguay, Zambia.
numerous other specifications that could be suggested. The results may also be rather sensitive to the choice of countries included in the sample. Indeed, we would be surprised if someone could not come up with a specification and/or sample which might even support the opposite conclusion. Notably also, the results do not allow us to distinguish between our own explanation and two alternative explanations for the observed relationship between the rate of growth of income and the percent of lawyers in the labor force (PLAW), namely (1) that it is the change in PLAW (not the level of PLAW) which reduces the rate of growthi and (2) that the causality is the other way around, i.e., that it is easier to resolve conflicts and hence to kee PLAW down, the higher is the rate of growth.’ P Therefore, the preliminary character of these results needs to be
underscored. The results, however, provide at least very tentative support for the hypothesis that, the higher are the percentages of the labor force induced to enter the legal profession, whose activities, on balance, may be of the rent-seeking and zero-sum-game variety, the lower may be the overall rate of per capita income growth. Despite the admittedly tentative nature of the result, the following interpretation is suggested. In the absence of appropriate guiding principles (which the market can provide only in an Arrow-Debreu world in which there is a complete set of perfect markets), three different vehicles may be identified for how and why the selfish motivations of individual agents may lead such agents into rent-seeking activities which make society worse off (especially in the future as a result of slower growth) than it would be
1460
WORLD DEVELOPMENT
without them. First, given the existing rules and laws, some lawyers (“ambulance chasers,” for example) may try to create or at least to exaggerate existing differences among different parties in order to generate more rents for themselves. Second, other lawyers (politicians, lobbyists and administrators) may either dehberately or inadvertently create restrictive or ambiguous rules and laws that have the effect of generating more rents. Third, since lawyers are by and large among the most intelligent members of society, their diversion from normal and especially from growth-enhancing economic activities, has the effect of reducing both the level of aggregate output and its rate of growth. Notably, just as Krueger (1974) demonstrated with respect to import licenses, the imposition of monopolistic restrictions on entry, such as those on the number of seats in law schools, the enforcement
of high standards on bar examinations and the licensing of law schools, may be beneficial in that such restrictions could reduce the quantity of human capital resources going into rent-seeking, growth-reducing activities. Alternatively, however, such restrictions might simply have the effect of pushing the costs of rent-seeking to a different level, as for example in more courses designed to raise the applicant’s scores on the aptitude test, bar examination or any other measure designed to restrict entry. The results of this paper suggest that societies which find ways of reducing the number of highly people that are needed for resolving qualified
conflicts, thereby allowing people to concentrate on economically productive activities, may be better able to enjoy more rapid economic growth than societies which are not able to do so.
NOTES 1. For evidence see Pryor (1983). Choi (1983a) and the other papers in Mueller (1983). 2. Among those to have made such pleas in the US in recent years are Chief Justice Warren Burger, Justice Sandra Day O’Connor and several former Law School deans such as Derek Bok, now President of Harvard University. 3. The reasons for the diversion of such resources are of course the high pecuniary returns and also non-pecuniary rewards (prestige and political power) that are associated with the legal profession. Therefore, the phenomenon can be interpreted as resulting from rent-seeking behavior. 4. Since firms could and presumably do cover such costs by raising prices, this is certainly not a necessary outcome. To the extent, however, that smaller, less profitable firms in the same industry are less affected by such legal activities, their prices need not rise, making it difficult for litigation-prone firms to fully offset such costs with higher prices for the goods and services they produce. 5. A somewhat similar measure has been used by Pashigian, e.g., Pashigian (1982) although in a quite different context. 6. Since in many cases membership in a bar association is a requirement for practicing law and, even when such membership is voluntary, it is almost universal, this shortcoming does not seem great. Some upward or downward biases are nevertheless quite possible. Where multiple memberships are common there may be some overestimation of numbers of lawyers. On the other hand, underestimation may arise to the extent that there are paralegal personnel who serve the functions of lawyers even though they are not
eligible for membership in bar associations. Until very recently, however, the latter_ phenomenon does not seem to have been important anywhere. Note, however, the dissenting view offered by Tsubota (1984). 7.
For example,
to the extent
that lawyers are
involved in reducing crime, in promoting the rule of law and the use of rules in settling actual or potential disputes both after they arise or more importantly before they arise and in taking the ambiguity and hence the potential sources of conflict out of contractual arrangements, their effect would be to reduce transactions costs and to encourage growth and development. By and large, however, these roles are relatively minor. 8. For such a suggestion (1980). 9.
See Hirschman
see Nakagawa and Ota
(1970).
10. The inclusion of RINV and REXP in the same equation as RYCAP implies that the regression coefficients of those variables and the value of RZ are biased upward because of the inclusion of both investment and exports in the definition of aggregate income. While this bias could be eliminated by excluding these components from the definition of the left hand side variable, because the effects of the PLAW variable on which the test results are focused could well extend to these components in the present context their elimination would not be appropriate. Therefore, no such adjustment is carried out. 11. In this respect than those obtained variations in growth robustness in such (1982, Chap. 4).
the results are much more robust in several other studies explaining rates across countries. The lack of studies was pointed out by Olsen
ADVERSARY
ACfIVlTIES
AND
12. This alternative hypothesis cannot bc rcjwlctl because PLAW is mcasurcd at or near the end of lhc
PER
CAPITA
INCOME
GROWTH
1461
13. This possibility, suggested by Williamson (1975, Chap. 7), WiiS pointed out to us by Takahiro Miyao.
period in question and because it is quite likely lhat the high values of PLAW in countries included in the sample arc of relatively recent origin.
REFERENCES Choi, Kwang, “A statistical test of the political economy of comparative growth rates model,” in Mueller (1983a). Choi, Kwang, A Study of Compuuiive Ru~a\ o] Economic Grow/h (Ames: Iowa State University Press, lYH3b). Hayami, Yujiro, and Masao Kikuchi, Asicm Villuge Economy al the Crossroads (Baltimore: Johns Ilopkins University Press, 1981). Hirschman, Albert 0.. Exit, Voice and Loyully (CamPress, 1970). bridge: Harvard University of the Krueger, Anne O., “The political economy rent-seeking society,” American Economic Review, Vol. 64 (June 1974) pp. 291-303. Mueller, D. C. (Ed.), The Political Economy of Growth (New Haven: Yale University Press, 1983). Murrell, Peter, “The comparative structure of growth in the major developed capitalist nations,” Sour/tern Economic Journal, Vol. 48, No. 4 (April 1982), pp. 985-995. Murrell, Peter, “The comparative structure of West German and British manufacturing industry,” in Mueller (1983).
Nakagawa. Yatsuhiro. and Nobumasa Ota. “The Japanese-style economic system,” in Masao Baba and Kimihiro Masamura (Eds.). Irrdustricd Socic/j Chikuma Shobo. 1980). und the Jupanese (Tokyo: North, Douglass C., Srnrcmre a,rd Change irl Economic History (New York: W. W. Norton, 1981). Olson, Mancur. The Rise and Decline of Nariotu’ Economic Growth. Stugjlarion arrd So&l Rigidities Yale University Press. (New Haven and London: 1982). Pashigian, B. Peter, “Regulation, preventive law and the duties of attorneys.” in W. Carney (Ed.), The Changing Role of the Corporale Aftorney (Lexington, MA: D. C. Heath. 1982). pp. 3-46. Pryor, Frederic L., “A quasi-test of Olson’s hypotheses,” in Mueller (1983). Tsubota, Junjiro, “Myth and truth on non-litigiousness in Japan,” University of Chicago Law School Record, Vol. 8, No. 30 (1984). Williamson, Oliver E., Markets and Hierarchies Anafysti and Antitrust Implications (New York: Free Press, 1975).