Law and Development 2011 June 9th, Spring semester, GSID
http://www2.gsid.nagoya-u.ac.jp/blog/shimadayuzuru/

Chapter 6 “Comparing Legal and Alternative Institutions in Finance andCommerce” by Franklin Allen and Jun “QJ” Qian.
Conventional wisdom = "to be successful in terms of long-run economic
growth a country needs good institutions. In particular, it needs a good
legal system that enforces contracts and resolves disputes and a goodfinancial system including financial markets and a banking sector tofund firm growth."(119)Argument: Is it true for all countries?

propertyrights (120)lawmaking(120)

120-121121

economy126-127138-139

legal system(+) strong incentives forinnovations(-) deterring competition,and inducing rent-seeking
behaviors
byvestedinterests.
(-) late response to change(limited time and effort todevote to one area of thelaw.
(+) equal and full access by
all and fairness in trials
and settlement.
powerful enforcement
long-term stability
lowmarginal
cost
forenforcement(-) less responsiveness tochange:by rent-seeking behavior
cost in revising laws(+) static environment withinfrequent changes(+) developed economy(-) Window dressing forwestern investors who do notunderstand China.
Only a disfavored means toresolve a breach that hadoccurred, but weak role indissuading future breaches.
(+)employed by developed
and democratic countries
such as the US, commits to
use the law as the basis forfinance and commerce andlegal institutions as theultimate
sourceforresolving
disputes
andenforcing
contracts;
further, changes to the law
must be approved by thelegislature and electorate.

140

alternative system(-)
existing
withinanetwork,
and
may
be
inaccessible to outsiders.
Instability and limited
enforcement.
-->
weak
long-term incentives.
(+) profit-sharing in thelongrunandreputation-based
mechanisms can ensure good(cooperative) behavior.
(+) fast-growing economy(+) emerging economy(+) driving factors inscreeningpotential
business opportunities.

(+) there is no systematic
definition
ofprivate
property rights or property
law, and, in practice,nonlegal mechanisms are thenorm
forconducting
business; the process ofchange
infinance
andcommerce is often bottom-up
rather than top-down.

(+) more likely to foster
competition among different
mediation/
resolution
agencies/organizations.
1Law and Development 2011 June 9th, Spring semester, GSID
http://www2.gsid.nagoya-u.ac.jp/blog/shimadayuzuru/

140140-141(+) static environment with
infrequent and predictablechanges--> most effective one will
prevail.
(-) lack of enforcement
authority.
Insufficient to ensure good
behavior if future losses
arenotsubstantial
relative to the gains thatcan be made today, or if
theselosses
canberecapturedbyenteringother lines of business ornetworks(*needofexclusivenessandstability).
Inaccessibility.
weak long-term incentives(+) dynamic environment
withfrequent
andunforeseen shocks.

Legal system and alternative system:"In particular competition among different networks and institutions
can ensure the most efficient prevails, and it is not necessary to
persuade the legislature and the electorate that the law needs to berevised when circumstances change." (p.121) --> *Is it convincing?
Signal for transition:"Whether and how a transition from a system dominated by alternative
mechanisms to one using the law and legal institutions as the focal point
depends on the country's economic history ad growth potential, as wellas the workings of many other social and cultural factors that help build
the social norms in the society and business communities. " (142)patents
in2009 patentsper(thousands)
persons
Japan
349
2.74
Korea
162
3.35
EU
273
0.55
USA456
1.45
China
315
0.23
source: http://www.soei.com/jp/ipinfo/iptopics/003/001742.php

1000

patents per 1 billion
$ GDP
68.9
194.6
16.6
32
64.2

Decline of patent actions (12 Jan 2009 Nikkei Shinbun)
Patent holders reluctant to make law suit on their patents --> lawsuits sometimes do not pay.
Amended patent law (2004) --> suit against patent violation as well as administration lawsuit (to ask
patent invalid)2