The Effectiveness of Legal Reforms and the Gap Between Law on the Books and the Reality on the Ground

Abstract

This chapter conducts an exploratory analysis of the determinants of the effectiveness of legal reforms and the gap between legal rules and the reality on the ground. The empirical approach employed to measure whether legal reforms have been effective or not is by comparing the magnitude of the change in legal reforms versus the change in financial and economic outcomes. Concerning the determinants of the effectiveness of legal reforms, although the importance of each factor depends on the specific rule and outcome variable, institutional quality and mineral abundance have a positive impact on legal reform effectiveness. Concerning the gap between legal rules and economic performance, we construct an indicator of the gap as the difference between distance to the frontier in legal rules and distance to the frontier in economic outcomes, where distance to the frontier measures the distance of each economy to the best performance observed for each indicator. As regards the determinants of the gap between law on the books and the reality on the ground, the evidence supports the fact that common law countries are systematically associated with a larger gap in both creditor rights and investor protection with respect to financial depth and entrepreneurship. In addition, institutional quality is found to reduce the gap between creditor rights and investor protection relative to performance in terms of financial depth and entrepreneurship.