As a result of colonization, European institutions were transplanted throughout Asia, South America and Africa. These institutions included western legal systems. The two most prominent of these are the English system of common law and the French system of civil law. Primarily as a result of colonization, and to a lesser extent imitation, most nations of the world have legal systems derived from one of these legal traditions. This thesis argues that common law is more adaptable and provides greater flexibility in the face of changing economic circumstances and therefore has a significant and positive impact on economic growth.
This thesis further seeks to analyse the transmission mechanisms by which common law may impact on economic growth. The transmission mechanisms identified include factor accumulation, improvements to broader institutional quality and financial development. In order to empirically analyse the direct effect of common law on economic growth, standard OLS growth regressions is the method of choice. The indirect effects are investigated using a simultaneous equations model which allows common law to jointly determine economic growth, the accumulation of physical and human capital, institutional quality and financial market development.
It is concluded that con11non law impacts on economic growth both directly and indirectly. The indirect effect is through improvements to broader institutional quality, and not through financial development as has been postulated by La Porta et ale (1997, 1998), Beck et ale (2003) and Beck and Levine (2003). These results hold after controlling for geography, culture, alternative measures of institutions, alternative measures of financial development, and sample coverage. However, common law is less significant when low income countries are excluded from the sample and when other institutions that were transplanted during the process of colonisation are included in the regressions. These findings have few direct implications for policymakers as the legal system is a persistent institution that changes only gradually over time. This thesis does not identify legal origin as the most important factor for growth, nor even a cause. Rather, common law should be seen as a facilitator of economic growth.