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Law, Finance and Investment: Does Legal Origin Matter in Africa?

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The Review of Black Political Economy

Abstract

This paper assesses if legal origin explains domestic, foreign, private and public investments through financial intermediary channels of depth, efficiency, activity and size. The findings show that legal origin matters in the finance-investment nexus, though its ability to explain aggregate investment dynamics only through financial intermediary channels is limited in the cases of private and public investments.

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Notes

  1. “mission teachers in British Africa not only taught their pupils how to read and write, but also taught them how to try their hands at many different jobs because the teachers themselves, besides giving lessons, were also engaged in such diverse activities as constructing their own buildings, cultivating their own crops, experimenting in agriculture and building roads” (Gann and Duignan 1970, p. 354).

  2. “The French and English traditions in monetary theory and history have been different… The French tradition has stressed the passive nature of monetary policy and the importance of exchange stability with convertibility; stability has been achieved at the expense of institutional development and monetary experience. The British countries by opting for monetary independence have sacrificed stability, but gained monetary experience and better developed monetary institutions” (Mundell 1972; pp.42–43).

  3. While Agbor (2011) investigates how legal traditions affect economic performance, Asongu (2013a) has proposed four theories in assessing why legal origin matter in growth and welfare. Both studies are focused on the sub-Saharan part of Africa.

  4. The British and French implemented two very different colonial policies. While the French imposed a highly centralized bureaucratic system that clearly underlined empire-building, the British administered decentralized, flexible and pragmatic policies. Economic ambitions dominated British colonial activities who sought to transform their colonies into commercially viable trading countries through the indirect-rule: producing raw material and consuming British manufactures. The French on their part propagated an imperial ambition through the policy of assimilation.

  5. “This paper proposes and empirically validates four theories of why legal origin influences growth and welfare through finance. It is a natural extension of “Law and finance: why does legal origin matter?” by Beck et al. (2003). We find only partial support for the Mundell (1972), La Porta et al. (1998a) and Beck et al. (2003) hypotheses that English common-law countries tend to have better developed financial intermediaries than French civil-law countries. While countries with English legal tradition have legal systems that improve financial depth, activity and size, countries with French legal origin overwhelmingly dominate in financial intermediary allocation efficiency. Countries with Portuguese legal origin fall in-between” (Asongu 2013a; p.1).

  6. “The dominance of English common-law countries in prospects for financial development in the legal-origins debate has been debunked by recent findings. Using exchange rate regimes and economic/monetary integration oriented hypotheses, this paper proposes an “inflation uncertainty theory” in providing theoretical justification and empirical validity as to why French civil-law countries have higher levels of financial allocation efficiency. Inflation uncertainty, typical of floating exchange rate regimes accounts for the allocation inefficiency of financial intermediary institutions in English common-law countries. As a policy implication, results support the benefits of fixed exchange rate regimes in financial intermediary allocation efficiency” (Asongu 2011a; p.1).

  7. With the exception of Portuguese countries, English countries reflect higher levels of trade because they traditionally have legal systems that provide for openness (in trade and capital) and competition: this is in line with Agbor (2011). Conversely it is not unexpected that countries with French legal tradition should have the lowest levels of inflation. French colonial monetary legacy is focused on lowering levels of inflation because their former colonies have sacrificed financial independence and monetary experience for exchange stability (Asongu 2013a; b).

  8. While the contradictory findings may be seen as though the consensus on the theoretical underpinnings is questionable or not taken seriously, we argue that ‘theoretical consensus’ is not absolute. This is the reason applied econometrics is meant to either refute or accept existing theoretical consensus along different empirical frameworks. The scope and positioning of the study is clearly aimed at verifying the consensus in Africa to complement existing literature. Hence, since the exploratory analyses do not lead us to validate the consensus, we have provided some explanations. We have further taken a minimalistic approach in not inferring causality by using ‘may’ to elucidate the contradiction.

  9. Economic and Monetary Union of West African States.

  10. Economic Community of West African States.

  11. “The dominance of English common-law countries in prospects for financial development in the legal-origins debate has been debunked by recent findings. Using exchange rate regimes and economic/monetary integration oriented hypotheses, this paper proposes an ‘inflation uncertainty theory’ in providing theoretical justification and empirical validity as to why French civil-law countries have higher levels of financial allocation efficiency. Inflation uncertainty, typical of floating exchange rate regimes accounts for the allocation inefficiency of financial intermediary institutions in English common-law countries. As a policy implication, results support the benefits of fixed exchange rate regimes in financial intermediary allocation efficiency” (Asongu 2011a, p. 1). While the discussion on inflation uncertainty may not be in line with Quantity Theory of Money in the perspective that, fixity and flexibility of exchange rates may have nothing to do with inflation, the inference is based on a recent empirical in African countries (Asongu 2011a, p. 1).

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Acknowledgments

The author is highly indebted to the editor and referees for their useful comments.

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Authors and Affiliations

  1. African Governance and Development Institute, P.O. Box 18 SOA/1365, Yaoundé, Cameroon

    Simplice A. Asongu

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Correspondence to Simplice A. Asongu.

Appendices

Appendices

Appendix 1

Table 7 Countries selected for the study
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Appendix 2

Table 8 Correlation analyses for financial intermediary variable selection
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Appendix 3

Table 9 Correlation matrix
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Asongu, S.A. Law, Finance and Investment: Does Legal Origin Matter in Africa?. Rev Black Polit Econ 41, 145–175 (2014). https://doi.org/10.1007/s12114-013-9173-7

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