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Constitutions and Commitment: Evidence on the Relation between Institutions and the Cost of Capital

By Nathan Sussman and Yishay Yafeh. Reading for week of December 9, 2003.


This paper challenges the North and Weingast (1989) view that attributes Britain’s
ascendancy to economic supremacy to institutions that provided protection of property rights starting in the late seventeenth century. We show that for much of the eighteenth century, interest rates in Britain remained fairly high, and fluctuated considerably in response to political instability. We also show that the volume of British government debt remained low for nearly a century after the institutional changes described by North and Weingast. Finally, we show that British interest rates moved in tandem with Dutch interest rates, suggesting that Britain did not embark on a different path following the institutional changes of the late seventeenth century. We conclude that, in the short run, institutional reforms do not lead to higher growth by lowering the cost of capital. For emerging markets today, this result implies that the immediate financial rewards for internal stability and peace are likely to exceed the short-term benefits from institutional reforms, which are rewarded only in the long run.

Download File: sussman_yafeh.pdf

Center for Comparative and Global Research