"The ideal of individual liberty seems to have flourished chiefly among people where, at least for long periods, judge-made law predominated" (Hayek 1973, 94).

Recently, financial economists have produced evidence that financial markets contribute to economic growth and legal institutions contribute to the growth of financial markets. King and Levine (1993) demonstrate that countries with more developed financial markets experience faster per capita GDP growth. La Porta and othersl. (1998; 1997) find evidence that the extent to which a country’s corporate laws protect the interests of minority investors is an important determinant of the cost of external capital. They also, interestingly, find that countries whose legal systems are derived from the common law tradition provide superior investor protections on average. Levine (1999) finds that better investor protections are associated both with more developed financial markets and faster economic growth.

While the causal link between investor protection and financial market development seems obvious enough, the apparent link between the common law tradition and investor protection is more surprising. Corporate law seems an unlikely place to find a systematic difference between common and civil law countries. Compared to other areas of commercial law, such as contracts or commercial paper, corporate law has been largely code-like in the common law countries from a very early date. This raises the question of whether the tendency toward more efficient rules of corporate law in common law countries is a coincidence that might disappear or reverse in other areas of commercial law.

On the other hand, it may be that the common law provides superior property rights protections across the board, leading to faster economic growth not merely through its impact on financial markets but on all commercial activities. There is, after all, a substantial difference in the ideas motivating the common and civil law traditions. The judges who played a leading role in shaping English common law were deeply concerned with protecting property and contract rights. By contrast, the scholars who shaped the civil law, especially the Code Napoléon, were concerned principally with creating a strong, centralized executive to pursue collective goals. Thus Hayek (1960; 1973) argued forcefully for the superiority of the English to the French legal tradition.

It is not obvious that this difference in intellectual history translates into practical differences today. Many legal scholars have noted that the differences between the common law and civil law loom larger in theory than in reality. In the United States, for example, much of commercial law has become fairly code-like over the course of this century because of the adoption of the Uniform Commercial Code and the federal bankruptcy code. In civil law countries judges and scholars have come to appreciate that no civil code can be sufficiently complete and unambiguous as to remove all discretion from the judges who apply it. Thus, while in theory civil law judges follow only the code and not the precedent, in practice they pay attention to prior decisions of appellate tribunals (Merryman 1985).

This paper therefore attempts a preliminary analysis of whether the differences between the common law and civil law traditions are sufficient to produce differential economic outcomes.* I first provide cross-country evidence that the common law is associated with higher per capita economic growth compared to the civil law. I then survey possible explanations and suggest that the most promising one lies in the common law’s stronger protections of property and contract rights against administrative action. The common law has a strong tradition of judicial review of administrative decisions and the civil law has an equally strong tradition of keeping ordinary judges out of the way of administrators. The comparative freedom of common-law courts to overturn administrative decisions makes rent-seeking more costly (because its outcome is more uncertain) in a common-law system, leading to a reduction in rent-seeking. I present evidence that governments in common law countries, on average, interfere less than their civil law counterparts with private economic activity.

Conclusion

During 1980–97—an era when it seems plausible that government policies had an especially large effect on economic growth by influencing the extent of participation in the expanding international economy—common law countries experienced dramatically larger real per capita GDP growth, on average, than did civil law countries. The difference remains when we control for initial GDP and secondary school enrollment, for foreign trade or proxies for trade, or for geographical region.

A plausible explanation is that the common law countries were more apt to structure their economic systems around property and contract, and less around government economic activity and redistribution, than the civil law countries. A concrete mechanism through which that effect may occur is the two traditions’ different treatment of administrative action. Common law countries give judges more authority to overturn administrative decisions alleged to violate individual rights than do civil law countries. This may reduce the amount of rent-seeking and increase the relative importance of markets.

That is not to say, however, that differences in administrative law fully explain the more market-oriented policies in the common law countries. Differences in the intellectual and ideological background of the common law and civil law systems may also make a difference. Merryman (1985) defines a legal tradition as including "a set of deeply rooted, historically conditioned attitudes about the nature of law, [and] about the role of law in the society and the polity." In many, if not most, countries, lawyers are important participants in government. Differences in the way common and civilian lawyers think about law—particularly differences in the way they think about individual economic freedoms versus collective political freedoms—may influence their approaches to government policy. Hayek, in other words, may have been right.

It is also important to recognize that legal systems are endowments but not straightjackets. Over the past decade, governments in Latin America—uniformly civil law countries—have made a dramatic shift to more market-oriented policies. For developed countries, in which legal systems are deeply rooted, market-oriented policies will not arise from changes in legal tradition, but from changing political leadership and public attitudes. The results reported in this paper, however, may be of more interest for transition countries still in the process of creating legal institutions. The common law and its associated attitudes toward property and contract may be more attractive than the civil law tradition that has dominated legal development in the post-communist world to date.