Contract enforcement, investment and growth in Uruguay since 1870

Abstract

Institutions and their quality are central concepts in the recent development and institutional economics literatures. Our hypothesis is that inadequate contract enforcement has hindered investment and, in consequence, indirectly has had a negative effect on Uruguay\2019s long-term growth performance. We first review the main concepts and the approaches to define and measure the quality of contract enforcement. We then introduce one measure that has the advantages of being measurable into the past and not depending on subjective judgments; namely, the \201Ccontract intensive money\201D (CIM) indicator proposed by Clague et al. (1999). Using our long series for the CIM indicator, and extending key macroeconomic variables backwards to 1870, we are able to estimate a structural model to explore the plausibility of our hypothesis. In the estimation, based on the seemingly unrelated regressions (SUR) method, we find support for the thesis that the quality of contract enforcement influences growth through its impact on investment. Put differently, our results suggest that poor contract enforcement played a significant role at the root of Uruguay\2019s underperformance, and in its experience of (relative) long-run decline.