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family of legal systems to which a legal system belongs determines its economic performance. Systems whose modern law is based on French law, through migration of people, colonial imposition or voluntary transplantation, fare worst. Systems whose legal origin is German have better economic performance. Anglo-American systems lead to the best performance.

What can explain this? Here, there are two versions. The first version points to differences in the role of the government in the legal system. The more dominant the State, the less supportive of financial development is the legal system. Where the State was stronger, as manifested in a dependent judiciary, inquisitorial trial procedure or disrespect for private property, the legal system ended up being less investor friendly. Where the judiciary was independent, the trial procedure adversarial and private property rights respected, the system ended up being more protective and supportive of investors.

The second version points to the mechanisms of change that characterizes each type of legal system (Schleifer and Glaeser 2002). The case-law-based common law system responds faster to changes in economic needs than statute or code-based systems. Both versions suggest not only that law matters but also that history matters. What determine present performance are the past features of the legal system. The relevant questions here are: Was the State strong in the past?, Was the judiciary independent in the past?, Was the mechanism of change in the past based on court decisions? The crucial period in the past is the 12th-13th centuries, when common law diverged from continental law and, within a short formative stage, acquired the characteristics that distinguish it from continental law until today. What matters is the legal origin.    

North and Weingast, coming from a New Institutional Economics perspective, identify solving the problem of credible commitment by the State as a key to explaining economic development (North and Weingast 1989; North 1990). The British solved this problem around the time of the Glorious Revolution of 1688. The solution marked the emergence of an expanding stock market and the beginning of a century and a half of continuous and unprecedented economic growth. Countries such as France, which were unsuccessful in solving the problem, muddled.

The British solved the problem party by using constitutional design to limit the power of the State. A strong and unconstrained State cannot credibly commit not to expropriate its creditors. The British weakened their Crown by shifting powers to Parliament through the Bill of Rights, and establishing a constitutional monarchy. But their constitution was not paramount or entrenched and Parliament could still expropriate by way of legislation. The British needed additional shackles. These were created by forming institutions that would counterbalance Parliament; notably, the Bank of England. The Bank administered the national debt of Britain, ensuring that bondholders will be repaid through tax revenues and be protected from expropriation. Interest groups of politically powerful investors that organized around the Bank and other financial institutions clustered around Parliament and the Crown to prevent them from defaulting and expropriating. Three layers, constitutional, institutional and interest groups, constrained the State and made its commitments credible.

Rajan and Zingales claim that governments don't always want to develop mechanisms for conveying credible commitments (Rajan and Zingales 2003). The knowledge of how to design mechanisms that would prevent governments from withdrawing their commitments was available in the Dutch republic in the late 16th century and in Britain in the late 17th century. It could have been transferred to other places. The fact that the mechanism did not spread throughout Europe indicates that there was opposition to its adoption. Interest and class groups did not want to encounter a strong State. For credible commitment to be adopted, the aristocracy had to be

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