The legal environment, banks, and long-run economic growth

This paper examines the relationship between the legal system and banking development and traces this connection through to long-run rates of per capita GDP growth, capital stock growth, and productivity growth. The data indicate that countries where the legal system (1) emphasizes creditor rights and (2) rigorously enforces contracts have better-developed banks than countries where laws do not give a high priority to creditors and where enforcement is lax. Furthermore, the exogenous component of banking development-the component defined by the legal environment-is positively and robustly associated with per capita growth, physical capital accumulation, and productivity growth.