Development Economics 1st

Edition Gerard Roland

Full download link at: https://testbankpack.com/p/solution-manual-
for-development-economics-1st-edition-by-gerard-roland-isbn-
0321464486-9780321464484/

Chapter 10
Legal and Fiscal Institutions
1. The common law system relies mostly on precedent, that is, on previous judgments,
whereas the civil law system relies on the written code of civil law. Civil codes typically
contain many bright line rules that give judges little or no leeway for interpretation.
Judges in common law systems have more power in the sense that they must base their
judgments on precedents, which leaves more room for interpretation. Common law
systems rely greatly on oral argument and evidence. Adjudication is by appointed judges
whose task is to implement the law. In the civil law system, justice is typically rendered
by a panel of judges, whereas under common law it is rendered by the jury assisted by a
single judge. Civil law is a more centralized system supposed to render justice in a more
homogeneous way. There is a judicial hierarchy. Written evidence helps better monitor
adjudication by the appointed judges via a comprehensive system of review by judges
higher up in the hierarchy. Legal decisions can be appealed and reconsidered based not
only on legal arguments but also on how the facts were treated. This allows detecting
incompetence of lower-level judges. In contrast, in the common law system, appeals are
much more rare, and are not based on treatments of facts but only on the basis of law.
Another major difference between both systems is that common law systems are
adversarial, while civil law systems are inquisitorial. In the adversarial system, each party
brings evidence to court. The prosecution brings evidence against the defendant, and the
defense lawyer brings evidence in favor of the defendant. In the inquisitorial system, an
investigative judge who instructs the case before the trial opens collects all the evidence
for both parties.
The characteristics of common law can be explained by its evolution in England.
It is an inheritance from the tradition of customary law. In ancient Anglo-Saxon tribes,
whenever there was a legal dispute, an assembly of villagers or of wise elders would hear
the different parties and make a decision. This is the origin of trial by jury. Historically,
because jurors were generally illiterate, evidence had to be provided orally. In contrast,

Copyright © 2014 Pearson Education, Inc.

 the modern version of civil law, as developed in the Napoleonic code, that subsequently
formed the basis for the law in many countries, relies on written evidence. This is
consistent with other characteristics of the civil law system, in particular the need to
monitor adjudication given the lower separation of powers between the judicial and the
executive branch of government.

2. There are differences between common law and civil law in terms of the various
indicators used. The biggest differences are 1) proxy by mail is more allowed in common
law countries, 2) shares are not blocked before a meeting in all common law countries, 3)
the existence of an oppressed minority mechanism is much more present in common law
countries. If we now look at the differences between developed and developing countries,
the picture is a bit more complex. Common law developed countries do better in
protecting shareholder rights than developing countries but for civil law countries, it is
the opposite. Developing countries do better than developed countries on 1) one share
one vote, 2) cumulative voting/Proportional representation, and developed countries do
better on proxy by mail.
Turning now to creditor rights, they are in general much stronger across the board
in common law countries. The biggest difference is probably “no automatic stay on
assets” much more frequent in common law countries. There is no real pattern of
differences between developed and developing countries, apart from “restrictions for
going into reorganization” stronger in developing countries and “management does not
stay in reorganization”.
The fact that the law on the books looks better in developing countries may have
to do with the fact that the law in these countries is newer, and therefore takes into
account the international experience to a certain extent. Developing countries have,
however, big problems of law enforcement not present in developed countries.

3. The table below shows the differences.

India Brazil
One Share-One Vote 0 1

Proxy by Mail
allowed 0 0

Shares not blocked

before meeting 0 0

Cumulative
Voting/Proportional
Representation 0 0

Oppressed Minority 0 0

Preemptive Right to
New Issues 0 1

Copyright © 2014 Pearson Education, Inc.

 Percentage of Share
Capital to call an
Extraordinary
Shareholder Meeting 0.1 0.05

No automatic
Stay on Assets 1 1

Secured
Creditors Paid
First 0 1

Restrictions for
Going into
Reorganization 1 0

Management
does not stay in
reorganization 0 1

We see that Brazil, a civil law country, does better than India, a common law
country for both shareholder and creditor rights. Shareholder rights are not strong in
either country and creditor rights are stronger. We would need to do some historical
research to understand this difference.

4. A first reason is that the differences between common law and civil law countries are
most likely of second order effect compared to issues of the quality of institutions, law
enforcement, etc. where the difference between developing and developed countries
seems much larger than the difference between common law and civil law countries. A
second reason is that the differences between common law and civil law countries is
smaller than the difference across time within the same country or the same group of
countries, as documented by Rajan and Zingales.

5. One must make a difference between Islamic financial institutions such as Islamic banks
practicing banking according to the Law of Sharia, and using Sharia to arbitrate disputes,
and countries where financial markets are governed by Islamic law. The latter are less
numerous.
Here is a list of countries where financial markets are governed by Islamic law:
• Saudi Arabia
• Iran
• Iraq
• Sudan
• Afghanistan
• Pakistan
• Mali

Copyright © 2014 Pearson Education, Inc.

 • Yemen
These are countries where the entire legal system is governed by Sharia. In
reality, these classifications are tricky because the legal system of each country is very
specific. Moreover, in countries where there is an important Muslim population, one
finds many Sharia-compliant assets, Islamic banks, etc.
There is a world data base on Islamic banking and finance:
http://www.wdibf.com/organizations.html.

6. There are several reasons. First, they may have less administrative capabilities to collect
taxes. Second, there may be political economy constraints. For example, powerful
landowners may be sufficiently influential to prevent taxation of land. Third, the size of
the informal sector may be higher and that sector does not pay taxes. Fourth, the financial
sector may be less developed. If fewer businesses have bank accounts, they may find it
easier to hide from tax collectors.

7. Without taxes, labor supply is equal to 2 + 31.8 = 9.22. With taxes, labor supply will
depend on the after-tax wage and is equal to 2 + 2.41.8 = 6.83. To calculate the elasticity
of labor supply to wages, one takes the derivative of the log of labor supply to the log of
wages and one sees easily that the answer is 1.8.

8. One possible source of data is the IMF government financial statistics. The site is:
http://elibrary-data.imf.org/. You can use those data if your university has a subscription.

Otherwise, here are some web sites where the information could be found.
For India:
http://www.stockmarketsreview.com/recommendations/indian_union_budget_201314_re
view_analysis_322865/

For the UK:

http://www.ifs.org.uk/bns/bn09.pdf
http://www.ukpublicspending.co.uk/piechart_2012_UK_total

India 2012 budget

EXPENDITURES % of total REVENUES % of total
Interest
payments 21 Corporate taxes 25
Subsidies 17 Income taxes 13
Others 31 others 0
Plan
expenditures 32 customs 11
excise duties 11
service tax 7
non tax revenue 9
borrowing + 41
liabilities

Copyright © 2014 Pearson Education, Inc.

 Total 100 Total 100

UK budget 2012
Expenditures % of total Revenues % of total
pensions 25 Income taxes 29
national
insurance
Health care 23 contribution 20
Education 7 VAT 19
other indirect
Defence 8 taxes 13
welfare 12 other 19
Protection 3
Transport 2
General
government 2
other 9
interest 9
Total 100 Total 100

The categories are somewhat different. It is nevertheless possible to immediately

see some differences. In the UK, income taxes plus national insurance contribution from
roughly half of the revenues. These are forms of direct taxation. In India, it is less. In the
UK, pensions and health care cover nearly half of the expenditures. In India, these would
be under the plan expenditures, 32% of total expenditures, but are only a small part of
those, 20% at most, so probably around 6% of the budget. Interest payments are much
larger in India, because of the larger deficits.

9. Here is a document from the World Bank, which was involved in helping Tanzania:
http://www-
wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2007/07/18/00002095
3_20070718091728/Rendered/PDF/ICR0000551.pdf. Tanzania had in the 1990s a
structural government deficit. Its tax revenues were in particular very low. The reform
aimed at improving tax collection without increasing the tax rate. This was done by
reforming tax collection administration with the help of the World Bank to make it more
efficient and to broaden the tax base. This was on the whole a successful reform.
Another country that has been very successful in tax reform, in relation to a campaign
against corruption is Georgia. Here is a document explaining reforms in Georgia:
http://econpapers.repec.org/bookchap/wbkwbpubs/2234.htm
Some other transition countries have been successful in implementing tax reform.
This is the case for the Baltic countries (Estonia, Latvia, Lithuania), for Russia and for
Slovakia for example.

Copyright © 2014 Pearson Education, Inc.

10. Here is a figure looking at tax rates and the time to pay taxes. As one can see, there is a
strong positive correlation.

Tax rates and time to pay

1100

900
Total hours to prepare and pay taxes

700

500

300

100

-10 10 30 50 70 90 110 130 150

-100
Total tax rate (% of profit)

The 10 countries that do worst in terms of time to prepare and pay taxes are:
Brazil, Bolivia, Nigeria, Vietnam, Venezuela, Chad, Mauritania, Senegal, Cameroon, and
Ecuador. The 10 countries that do worst in terms of highest tax rates are: Congo, Gambia,
Comoros, Argentina, Uzbekistan, Tajikistan, Eritrea, Bolivia, Palau, and Colombia. It is
likely that these countries also do not score well on institutional measures of rule of law,
etc., but it can be a good idea to examine whether such a correlation can be found in the
data.

Copyright © 2014 Pearson Education, Inc.