Press Freedom and Economic Development

Zhiwu Chen Yale School of Management

Very preliminary draft and for discussions only

April 30, 2005

Abstract In economics of information, existing models often assume exogenously given information asymmetries to study their consequences. For example, Akerlof (1970) and Arrow (1978) demonstrate that severe information asymmetries can lead to market shut-downs or limit the growth prospect of an industry. However, given a level of information technology (IT) development, the degree of information asymmetry in the market place can be high or low, depending on whether information and opinions are free to flow on the media. That is, freedom of the media ultimately determines the remaining level of information asymmetries in a given economy. The degree of press freedom can proxy for the level of information asymmetries in the economy. To test this theory, it is recognized that the service sector, especially the financial industry, has a much higher dependence on informational institutions than the industrial sector (say, manufacturing). Based on a cross section of countries, we find that after controlling for initial per-capita GDP and other institutional factors, the initial press freedom level is the most robust significant predictor of relative future growth between industries that possess different degrees of information dependence: the service sector grows faster than the industrial sector in countries with a free press, while the opposite holds in countries with a restricted press. This paper also makes the point that the end of the 19th century was probably a turning point, before which freedom of the press was more of a political institution than an economically necessary one. However, after the Industrial Revolution fundamentally extended the geographical breadth of markets and transformed the industry structure of economies, the need for uninhibited public flow of information and for independent investigative business reporting rose to such an unprecedented level that without freedom of the media market development could be severely hampered. Press freedom is equally an economic institution today. The idea for this paper came about after a September 2002 seminar which the author gave on “Legal Jeopardy for China’s Media: an

empirical study of media defamation cases in China” at the Shanghai Institute of Law and Economics. The author benefited from

several distinguished participants including Professors FANG Liufang, HE Weifang, JIANG Ping, LIANG Zhiping, MAO Yushi, WU

Jingliang and SUN Xupei. He would also like to thank Matijn Cremers, Wenzhong FAN, William Goetzmann, John Griffin, Yonghua

WANG, and other colleagues and participants at the Yale School of Management faculty workshop. Wenzhong Fan and Steve Yun

have been very helpful in putting together the data and the tables. Any remaining errors would be the author’s sole responsibility.

Contact information: Zhiwu.chen@yale.edu, and 203-432-5948.

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Since the seminal work of Stigler (1961), information economics has made much

progress in providing a fundamental better understanding of markets and their supportive

institutions. Through this “intellectual revolution” (in the words of Stiglitz 2000), it is

now generally understood that information is imperfect in markets and that information

asymmetries have consequences that are far more crucial than the simple existence of

information costs. For example, Akerlof (1970) shows that in the presence of product

quality uncertainty (or information asymmetry between the buyer and the seller), the

market may be stuck in an “adverse selection” process with “good” quality products

leaving and only “lemons” staying in the market, eventually leading to a market

shutdown. Arrow (1971) presents another dire consequence of information asymmetry:

moral hazard (or the incentive problem). He uses insurance as the context to explain that

if consumers and firms are insured against risk, they will lack enough incentive to take

measures to reduce or mitigate the risk. Therefore, the impact of imperfect information

can go far beyond adding information costs to an otherwise perfect-markets equilibrium.

It can stop the markets from developing.

While there is now a better understanding of the consequences of information

asymmetry, the extant literature has typically taken the level of information asymmetry as

a given and paid little attention to soft informational institutions that govern the content

of information transmission in markets and society. Much work has been done on the

impact of information technology (i.e., the IT hardware) on information transmission

speed.1 However, even given today’s internet and TV technology that has made

instantaneous information transmission possible, it is not clear that individuals and the

media in every country are free to transmit whatever information, or express whatever

opinion, about a product, a public corporation or a market participant as they wish. In fact,

in our sample of 108 countries for which Freedom House gave a press freedom rating in

1990, the average rating was 54.4 on a scale of 1 to 100 (the higher the rating, the more

free the press), with the lowest rating at 11 and the highest at 93. Therefore, many

countries in the world still have rules and laws that restrict what can be legally

transmitted. While in some countries technological advances have been fully utilized to

1 Kaukiainen (2001) and Goetzmann and Ukhov (2004) for recent examples and references on the impact of steam ships, railroad and telegraph on information transmission speed.

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reduce the level of information asymmetry in the market place, this is far from being the

case in many other countries.

The purpose of this paper is to study freedom of the press (including print, TV

and other media) as a necessary institution for market development. The approach taken

is both historical and empirical. Historically, even though the economic press predated

the political press, freedom of the press has only been viewed as a critically important

political institution and a core foundation of any well-functioning modern democracy.

However, the economic value of a free press remains under-appreciated.2 Indeed, until

mid nineteenth century, freedom of the economic press was not much of an issue partly

because the early economic press (e.g., the Course of Exchange (1697) and Lloyd’s List

(1734)) provided merely lists of imports and exports of commodities at various ports and

price lists on foreign bills of exchange and stocks.3 Such newssheets collected market

information for the purpose of pricing and commercial decision-making but did not

express much opinions, so there should be less room for controversy. Hence, during the

early phases of the business media, speech rights were not a burning issue.

Though international trade was rapidly developing before the nineteenth century,

business transactions typically involved personal relations (not impersonal yet) and

corporate securities markets were still quite local in both the U.K. and the U.S.4 Only

more so in other parts of the world. But, after the introduction of the railroad and the

electrical telegraph in the mid nineteenth century, regions in the U.S., for example, were

substantially integrated into one national market (Davis 1966), making both the

commodities and the financial markets true impersonal markets, expanding beyond

physical and social boundaries. Transactions could no longer be based on personal

2 The important of a free press for business and the economy has been discussed in many general books, such as, Friedman (1982) and Sen (1999). Empirical studies of the subject are rare. The only exceptions are two recent papers: Djankov, McLiesh, Nenova and Shleifer (2001) and Dyck and Zingales (2002). In their path-breaking work, Djankov, et al (2001) investigate the ownership patterns of media corporations around the globe and examine the consequences of government ownership of the media for press freedom, political corruption and economic development (including financial market development). As will be clear, our focus in the present paper differs from theirs in that we address directly the importance of a free press as a necessary market institution for development and that the degree of press freedom in a country is a significant determinant of the type of industries which the country’s economy can focus on. Dyck and Zingales (2002) approach the media’s corporate governance role by examining how media’s reporting influences corporate environmental policies. 3 See Parsons (1989) for a detailed account of the historical evolution of the financial press, a topic to which we will return shortly. 4 See Davis (1965, 1966). According to the description of the nineteenth century U.K. capital markets by Lavington (1921), “The (cotton) securities are rarely sold by means of a prospectus and they are not underwritten: they are placed by private negotiation among local people who understand the cotton trade” (pp. 208-209).

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relations and the investor base started to expand beyond the Northeastern seaboard states.

By 1930, the Berle and Means (1933) Modern Corporation with dispersed outside share

ownership had become a dominant theme of corporate America. With geographically

expanded markets and shareholder bases, the governance of corporations is no less

complex than the governance of a mid- to small-size country: like the dispersedly located

citizens of a country, dispersed shareholders and consumers also need a free press and

other unfiltered media to learn about the producers of products and monitor the use and

misuse of their own capital by corporate managers. Investigating and monitoring the

behavior of corporations and providers of goods and services is as much of public interest

as the checks-and-balances are on the government. In particular, different views and even

harsh opinions about a firm’s strategies and products should be freely expressible through

any medium.

During the past 150 years, modern transportation and communication

technologies have also helped integrate other national markets. There is therefore a need

in every country for the press to freely provide independent information and unfettered

opinions about sellers and buyers in the market place. It is in this sense that freedom of

the press is today not only a political institution, but also a necessary institution for

economic development.

It should be noted that by “freedom of the press”, we mean not just “freedom of

economic and business information”, but also freedom to express one’s opinions and

views about any corporation and/or its products and securities. In an impersonal cross-

regional market for goods or securities, if participants and the media can freely publish

what they know and express their critical views about a product and its producer/seller,

such information and views can help lower the buyer’s informational and/or knowledge

disadvantage. Thus, our basic hypothesis is: the more free the press in a country, the

lower the information asymmetry in the market place and hence the less the country’s

markets are subject to Akerlof’s (1970) adverse-selection problem. As a result, the better

the chance for the country’s markets to develop.

Empirically, we can test the above hypothesis by regressing a country’s market

development on press freedom rating and other institutional and economic variables.

However, as noted by Rajan and Zingales (1998), even when such a simple regression

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yields significant explanatory power, it may be difficult to make inferences about

whether press freedom has cause market development or the reverse is true. To resolve

this potential issue, we apply a technique introduced by Rajan and Zingales (1998) to

regress cross-industry growth-rate difference on press freedom rating, where the growth-

rate difference is constructed between two industries that have different degrees of

dependence on informational institutions.

Specifically, take manufacturing and financial services as a contrasting pair of

industries. In toy manufacturing, for example, what is traded is tangible. A buyer can

inspect a toy car’s design, style and colors, to ascertain its quality and properties. He can

also test it one or more times before purchasing. The information asymmetry between the

manufacturer (or the seller) and the buyer is limited, though it always exists. Of course,

legal enforcement of product liability would be desirable in such a case. But, without

reliable legal recourse, the toy buyer may overcome legal deficiencies by inspecting and

testing the toy “harder”. Besides, even if the buyer finds product deficiencies later on, he

may be able to “live” with it as long as the toy “still works”. Therefore, the tangibility of

physical goods affords the buyer sufficient ability to mitigate transactional risks and

lower his informational disadvantage.

In contrast, what is traded in a securities transaction (say, a stock) is a financial

contract or a claim on a future cashflow stream. First, this claim will be worth nothing if

it is not backed by investor-friendly securities law and supportive legal procedural rules

and by an independent, effective judiciary. Second, precisely because of the intangible

nature of a financial security, its buyer is at a severe informational disadvantage: the

claim being traded has no color, style, weight or flavor; neither can the buyer test-drive it.

The buyer has to rely on the information disclosed by the issuer and provided by the

media, to value the security. In this case, the uninhibited flow of information, unrestricted

investigative reporting and free expression of opinions about the security issuer and

related parties is crucially important.

Recent discussions on corporate governance have correctly focused on, among

other things, disclosure laws and rules.5 As is known in China and other countries,6 if a

tough disclosure law is not coupled with an independent and free press, corporations will 5 La Porta, et al (1997, 1998) and references therein.

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disclose what is required by a required deadline. But, the disclosed information will be

trusted or looked upon by no one. This is also why William Browder, CEO of Hermitage

Capital Management, the largest public equity fund in Russia, reported to Dyck and

Zingales (2002) in an email that “the single most important corrective mechanism for

misgovernance is the press.”

Given the intangible nature of a financial security, the buyer has to rely on the

informational institutions to provide the quantity and quality of information for valuation

and on the legal institutions to enforce contractual rights. Therefore, securities markets

and the financial services industry as a whole are far more dependent on institutions than

manufactured goods markets. The financial industry is more subject to the Akerlof (1970)

“market for lemons” problem.

More generally, when the service and the industry sectors are contrasted, there

also exists a significant difference between them in their dependence on informational

and legal institutions. In a service market (e.g., health care, education), what is traded is

not tangible and hence it is more prone to consequences of information asymmetry.

For these reasons, our testable conjecture is that countries with a free press and

reliable legal institutions can grow their service sector (financial industry in particular)

faster than their manufacturing and heavy industries. Indeed, using a cross section of 107

countries, we find that the 1990 press freedom rating is the most significant explanatory

variable of the growth-rate difference between the financial services and the

manufacturing industries, for the period from 1990 to 2000. The more free a country’s

press and media, the faster its service sector can grow. On the other hand, countries with

a restricted press have to rely on labor-intensive manufacturing to grow their economies.

Perhaps, as long as a country has enough low-cost labor supply, manufactured goods

markets can develop even if it does not have a decent institutional infrastructure.

This explains why the Asian Tigers (except Hong Kong) in the 1960’s through the

1980’s and China in the last two decades have been able to grow, even though they did

not, and in China’s case it still does not, have acceptable legal institutions or a free press.

In fact, many commentators have been using the China growth story to challenge

the central thesis of institutional economics that institutions matter for economic growth.

6 See Hutchens (2003) for a review of the evolution of China’s securities regulations.

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Over the last two decades, China’s GDP has grown at an annual rate of more than 9%.

Yet, its press freedom rating has been among the lowest few countries and its legal

institutions are still being developed, with the caveat that the party’s absolute control of

the judicial process is not expected to end any time soon. On the surface, the China

experience seems to contradict the predictions of institutional economics, leading some to

question the validity of this academic discipline.7 Our explanation is that different types

of industry (market) depend on legal and informational institutions to different degrees.

By choosing to focus on manufacturing, China has been able to grow its economy even

without market-friendly institutions.

The remaining sections are organized as follows. Section 1 is devoted to

reviewing the evolution of the business press, to establish the claim that for the U.S. and

most developed countries the nineteenth century marked a turning point, after which

freedom of the press has become a necessary economic institution. Section 2 discusses

modes of business media control or censorship that exist today in countries. Data

description is provided in Section 3, followed by a presentation of empirical results in

Section 4. Concluding remarks are offered in Section 5.

1. Evolution of Informational Institutions In this section, the purpose is to demonstrate that in modern economies freedom of the

press and institutions that ensure it are equally important for economic prosperity as for

political checks-and-balances on the government. However, this was not the case and

freedom of the press was more of a political institution than an economic one, until after

the Industrial Revolution had substantially changed the world. In other words, when

markets were local within a specific geographical location, a business press would be

good to have to reduce information asymmetries but was less needed. In those days, press

7 Comparing China and India, Thakur (2003) comments that “A decade ago, China's per capita GDP was about the same as India's. Today it is double,” and that “Meanwhile, some of India's long-standing advantages over China are eroding or becoming less relevant, including English language competency, democracy and the rule of law.” Kristof (2003) contrasts economic conditions in Ukraine and China, which took diametrically opposite political paths in late 1980's and early 1990's. He says “Ukraine and most other constituents of the deceased Soviet Union giddily held presidential elections and pronounced themselves democracies, while China massacred protesters demanding more freedom and democracy;” “since 1989, … China's economy has tripled in size --- and Ukraine's has shrunk by half.” He then goes on to conclude that “authoritarian orderliness is sometimes more conducive to economic growth than democratic chaos.”

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freedom would be an irrelevant topic for economic development. However, as markets

extend beyond specific locations and as the nature of markets changes, the need for

independent, investigative business media rises in order to minimize the extent of adverse

selection and moral hazard. In reviewing the history of the business press, we should

keep in mind that as the geographic breadth of the markets extends, the “public interest”

represented by the business media increases and so should the weight given to the

protection of the media’s speech rights (when weighed against the reputation and privacy

rights of the subject being investigated in a report).

Indeed, even in the early modern years markets were local and “word of mouth”

was the main mode of information transmission, be it business or otherwise. In the

English-speaking world, the earliest business press may date back to the 1580s when bills

of entry (lists of exports and imports of commodities at various ports) were regularly

printed and distributed, and to the 1620’s and 1630’s for price currents of securities and

commodities (Parsons 1989). These early forms of the print press predated perhaps the

first general interest newspaper, The Weekly News, that came out in 1622 in Britain.8

Among the most famous business newspapers of the shipping and price-list variety were

the Collection of the Improvement of Husbandry and Trade (1692) , the Course of

Exchange (1697) and Lloyd’s List (1734). The early business media provided merely

shipping traffic and price currents of things traded, not much opinions or commentaries.

The coffee houses in London represented a major channel of dissemination for

information and for the newspapers. It was the coffee houses where personal exchange of

information and rumors could easily occur and where a variety of business newspapers

were provided for customers. In fact, some business publications such as Lloyd’s List

were started by the coffee houses themselves as they had a natural information advantage

at the time.

In those early formative years of the press, government censorship started to

emerge. In 1685, the Licensing Act was passed. As a result, anything published without a

license was criminal. While at that time publications such as the London Gazette

provided some news on business and trade, strict government censorship made the public

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media industry hard to grow fast enough to meet the rising needs of the business

community. Merchants could not turn to a single publication for reliable, timely financial

and trade information. In addition, because communications from abroad and the mails

were still slow, the printed news was often delayed and patchy and not reliable. Investors

and merchants had to rely more on coffee houses and private information channels.

After the expiration of the Licensing Act in 1695, the business press resumed its

growth in Britain. Besides printing price lists and shipping traffic information, the

newspapers devoted most space to advertising by stock promoters and merchants. For

example, on June 9, 1720, out of the 32 pages of the Daily News 23 pages were given to

business and stock advertisements (Parsons 1989, page 15). The growth of the business

press from 1695 to 1720 was so successful that it provided a necessary mass media

context for joint stock companies to promote their stocks and for commentators and news

writers to tort stocks for which they were paid. During such an early stage of journalism,

it is not surprising that newspapers were often paid to write and publish news stories that

served the paying advertisers. News space was for sale.

The booming media stimulated the public’s speculative mentality and in turn

fueled the spectacular stock boom of 1719-1720. It was a period in which newspapers

facilitated economic development by channeling trade-related news and information, by

allowing producers to advertise their products, and even by providing a new way for

economic ideas to be disseminated. They played a significant role in creating and

nurturing a commercial culture in the British society. Starting from that time, the

newspapers offered a forum of public discourse on issues that were of concern to

businessmen and other interested parties, creating a context conducive to economic

theorizing. A result of that period was the publication the classic Wealth of Nations by

Adam Smith in 1776. In a major sense, the British economy, financial markets, business

press and economic theory were pulling each other ahead together. Of course, it also

produced one of the well known stock market bubbles in history, the South Seas Bubble

of 1720 (Kindleberger 1978).

8 The first American newspaper, Publick Occurrences, did not occur until 1690 and it was short-lived. It was followed by a more successful newspaper, the Boston News-Letter, introduced in 1704. See Clark (1994).

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Shortly after that period, the first American daily newspapers came into existence:

the Pennsylvania Evening Post and Daily Advertiser (1783), the New York Morning Post

(1785) and the New York Daily Advertiser (1785). Like their British counterparts, they

disseminated trade news, market prices and the like.

For the reasons discussed below, freedom of the business press was not much of

an issue until the late nineteenth century.

1. Before the 1820’s, business newspapers were not much more than tables of

market information. Even when they did offer business opinions, they were biased

towards their advertisers (after all the advertisers were their main revenue source).

According to Parsons (1989, pages 22-23), for example, in 1785 The Times had pledged

to “give due attention to ‘the interests of the trade, which are so greatly promoted by

advertisements’ and facilitate ‘commercial intercourse between different parts of the

community’. In common with other papers, … it did not go beyond listing prices and

advertising.” Therefore, unbiased and critical reporting was not a common journalistic

practice of the day. As such, the speech rights of the business media would be hardly

challenged by the most likely plaintiff – business interests.

A major development did take place at The Times, which marked the beginning of

a new kind of financial journalism. Soon after introducing a “money” column, in 1817

The Times appointed the independent-minded and brave Thomas Alsanger to be its

financial editor and increased its business opinion content. In the years to follow, despite

that The Times was backed by substantial advertising by railroad interests, he repeatedly

warned that the railroad bubble would eventually have to burst. The advertisers

complained, but the editor backed him, which greatly enhanced the paper’s reputation

when the bubble did come to an end. For this reason, Parsons (1989) calls Alsanger the

“real father of financial journalism”. That beginning pushed the business media in a more

responsible direction.

On the American side, independent and unbiased reporting was also becoming a

preferred professional standard in the business press. The first pioneer was Gordon

Bennett who in 1835 founded the Herald in New York.9 His determination was to publish

a financial newspaper covering Wall Street and going beyond partisan opinions. His

9 See pages 24-25 of Parsons (1989).

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paper exposed Wall Street financiers and the like at the risk of offending them. As

another example, when John Thompson founded in 1842 what would become the

American Banker, he stated in an editorial that “We have no sympathies to influence, no

favors to ask, … We are too old to be trapped by fog financiers. It is our delight to crush

them. It is our sport to agonize them. It is our duty to exterminate them.” This is of course

extreme, but it does show that at the time unbiased reporting was becoming a new

business journalistic standard in the U.S.

Still, before the 20th century, financial journalists were not enjoying much

professional esteem, perhaps because of their perceived low journalistic standards and

their close connection with money and business. As Kenneth Fleet noted, in England

“The role and status of City editors and financial journalists were not always considered

to be important … They were regarded as an inferior breed concerned with remote and

esoteric subjects like the price of Consolidated Stock and the movements in the Bank

Rate. Their literary efforts were consigned to a small corner which the vast majority of

readers were expected to ignore” (quoted on page 41 by Parsons 1989). It is hard to

imagine that in that context many people would argue for protecting the freedom of the

business press.

All of that changed around the turn of the twentieth century. It was investigative

reporting pioneered by Ida Tarbell in 1900 that took business reporting to a new level and

brought enormous respect to the business press. Tarbell wrote numerous articles on

history topics for popular magazines for several years, before she was hired to be an

editor a magazine called McClure’s in 1894. Soon, she helped double the magazine’s

circulation after publishing a series of her articles on Abraham Lincoln and then on

Napoleon. In 1900, the changing economic and business landscape got her attention.

After waves of mergers and acquisitions, the American society had to live under such

monopolies as Standard Oil. She then started a two-year long investigation on Standard

Oil and John D. Rockefeller and wanted to use this story to expose business corruption

and political lawlessness. Over the two years, Tarbell looked through hundreds of

thousands of pages of documents, including court testimony, state and federal reports and

newspaper coverage. She also conducted many well-informed interviews with the

company's executives, competitors, government regulators and academic experts. From

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these, she gathered a wealth of information on the tactics used by Rockefeller and

Standard Oil. Such investigative research was a totally new journalistic method up to that

time. In November 1902, she published her first story, “The History of the Standard Oil

Company.”10 It was instantly popular with readers, and the series then extended into

October 1904, with a total of 19 parts.

Ida Tarbell was an immensely important figure in the history of business

journalism. Her expose of Standard Oil not only led to the break-up of the company, but

also started a wave of investigative reporting. The media attack on business monopolies

and corruption went on for the next decade, which is often referred to as the muckraking

decade. That resulted in the publication of more than a thousand articles giving detailed

accounts of the economic and political corruption caused by big business. One of the

most influential articles was Upton Sinclair's The Jungle (published in 1906), exposing

the highly unsanitary practices of the meatpacking industry. That leap-forward of the

business press was also made possible by advances in low-cost printing technology.

Investigative reporting is what has made the protection of freedom of the business

press an issue of importance to economic and capital market development. Note that as

Tarbell was conducting her investigation on Standard Oil, her father feared that

Rockefeller would retaliate against the magazine and hence advised her to stop. Freedom

of the press had been an established principle in America since 1735 when John P.

Zenger was acquitted in a criminal prosecution for seditious libel.11 But, up to Tarbell’s

time, suing media publications for business stories was not a common practice by

corporations. We will return to this issue in the next section

2. The second reason for freedom of the business press to be a non-issue back

then has to do with the fact that unlike general-interest newspapers, the business press

had a relatively “specialized” readership and not so much a “mass media” before the late

nineteenth century. We can look at this from several angles. Precisely as Kenneth Fleet

said, “money” pages and “esoteric” financial information were not for everyone in those

10 For a complete collection of the articles by Tarbell, see Tarbell (1987). For a brief coverage of the story, see the PBS story “People & Events: Ida Tarbell, 1857-1944” at http://www.pbs.org/wgbh/amex/rockefellers/peopleevents/p_tarbell.html. 11 In the early 18th century, Zenger was the editor for the New-York Weekly Journal and published a series of attacks on the policies of New York’s governor. He was then prosecuted and arrested in 1734. But in the following trial, the jury gave a “not guilty” verdict, marking the first win for press freedom in America. See Levy (1966).

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days. Until the abolition of advertising duty in 1853 and paper excise duty in1861,

business newspapers in Britain were a relatively expensive purchase, which limited their

circulation and readership base.

As North (1958) noted, the western world was predominantly self-sufficient

economies at least until late 18th century. It was the railroad, the telegraph and later the

telephone from the mid to late nineteenth century that broke the boundaries and

integrated local markets within a country into one national market. Before the railroad

network was sufficiently developed in the U.S. and other countries, it was water transport

that carried the weight of bulk shipping for commodities and it was the development of

ocean shipping that linked national economies with each other. However, ocean

transportation alone could not integrate different inner regions of a country into one

national market. Intra-country areas were still segmented from each other before the late

nineteenth century. For example, even after the telegraph was invented in the 1840’s, for

several decades it was not used to transmit newspaper content across regions to speed up

the delivery of newspapers. Before the railroad, horses and other traditional transport

means were the main newspaper carriers. According to Lee (1976), even with the

railways delivering newspapers to places in the U.K. in the late 19th century, the delivery

was too slow for the newspapers to represent “news”. A “mass” national press (not to

mention a national business press) was hardly developed in Britain even by late 19th

century.12

Also, intra-country financial integration was not completed until the late 19th

century. This may have been a consequence of a not-yet-developed national business

press (business newspapers were mostly local), or it could be the cause of the latter

(when regional markets were not integrated enough, there might not be enough shared

business topics and issues of interest across localities). In the U.S., for example, even by

1880 different regions could be hardly considered financially integrated. In an influential

study, Davis (1965) compares (i) mortgage interest rates and (ii) bank asset returns across

American regions from 1880 to 1930. To save space, let’s select New England, the South

(including Virginia, West Virginia, North and South Carolina, Georgia, Florida, 12 “… it was to be long before this ‘interest’ was developed to an extent which made a national press a normal and accepted British institution. Until the 1870s, … this development was was held up partly by the inability of the railways

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Alabama, Mississippi, Louisiana, Texas, Arkansas, Kentucky, and Tennessee) and the

Great Plains and part of the Mountain states (including North and South Dakota,

Nebraska, Kansas, Montana, Wyoming, Colorado, New Mexico, and Oklahoma). Figure

1 plots the average farm mortgage interest rates for each region and each year, while

Figure 2 displays the average reserve-city bank returns for each region and each year.

Figure 1 suggests that while there was a clear converging trend in mortgage rates across

the regions before 1900, a definite convergence did not occur until about 1930. For the

period covered, banks were not allowed to invest in mortgages and hence bank loans

tended to be short-term. The return differentials between regions hence reflect differences

in short-term commercial paper interest rate. Figure 2 suggests that for some years in late

19th century the average asset return for the Great Plains states was twice as high as the

gross return in New England, indicating strong non-integration between the regions.

There seemed to be better convergence after 1900 (at least the bank returns in the Great

Plains and Mountain states were no longer twice as high as in New England). From

Figures 1 and 2, the mortgage rates and bank asset returns in New England were quite

stable throughout the period, confirming the fact that this region has always been the

most financially developed with abundant supply of capital. It was the other regions that

were catching up and benefiting from the outflow of New England and New York’s

financial development.

The point here is that when the geographical spread of a market is not beyond a

local area or when the readership circle is not wide, the level of information asymmetries

should not be high in the market place and the degree of “public interest” represented by

the business press should be relatively low as well. As markets expand geographically

and become more impersonal, there is more “public interest” at stake and the roles to be

played by the business media grow bigger, which demands a higher degree of freedom

for the business press.

3. The third reason has to do with the development level of the stock market. A

careful observation will suggest that even today the stock market perhaps offers the most

common financial and business topic among the public. In particular, the almost to deliver the London papers in time for early morning distribution, but even with the advent of special newspaper

14

continuous trading in thousands and more stocks provides a continuous flow of “news”

and excitement (or, disappointment). Historically, one could say that the financial press

and the stock market grew together in the U.S., the U.K. and other countries. Not

surprisingly, in both London and New York, the newspaper industry grew up in close

proximity to the financial centers: “newspapers were the only thing actually made or

produced in the City or Wall Street!” (Parsons 1989, page 18).

Trading in joint stock company shares started in the 16th and 17th centuries, first

with such famous merchant companies as the Russia Company, the Virginia Company

and the East India Company. But, after the South Sea Bubble episode of 1720, the British

Parliament passed the Bubble Act, banning the creation of any new joint-stock companies

without Parliament's express approval. The ban stayed on for 105 years, which largely

limited the development of the stock market in England and made the London Stock

Exchange trading mostly focused on government and infrastructure bonds (both domestic

and foreign) until the late 19th century. In the U.S., participation in stock market trading

was also low until the railroad stock boom in the 1860s and beyond. In 1800, the joint

stock company form was used mainly for infrastructure construction projects (mostly

quasi public corporations) and banks and insurance companies. Up to that year, there

were 335 corporations formed in the U.S., of which 219 were turnpike and bridge

infrastructure companies, 36 water and fire protection companies, 67 bank and insurance

companies, and only 6 manufacturing firms (Berle and Means 1933, page 11). The

number of shareholders was small at that time. When the first modern textile corporation,

The Boston Manufacturing Company, was formed in 1813 in Waltham, Massachusetts, it

had 11 shareholders. The number of shareholders was 76 in 1830 and 123 by 1850 (Berle

and Means 1933). It is hard to imagine that those shareholders would have been from

outside the local area, or that you would need a mass business press to ensure an

acceptable level of corporate governance.

When the first of major railroad mergers took place to form the famous New York

Central Railroad in 1853, the pos-merger corporation had 2445 shareholders (Berle and

Means 1933, page 13). While these shareholders were spread in Albany and other cities

in New York and impressive by the then standard, the total number was not large. Among

trains, … a ‘national’ press had still not fully developed by the turn of the century.” (Lee 1976, page 73).

15

the three largest corporations around the turn of the 20th century, Pennsylvania Railroad

had 13,000 investors in 1880, AT & T had 10,000 investors and U.S. Steel 15,887

investors in 1901. But, 30 years later in 1931, their respective shareholder numbers were

241,391, 642,180 and 174,507, each reaching a new magnitude of shareholder dispersion

(Berle and Means 1933, Table VII).

Berle and Means (1933, Table VIII) estimated the total number of investors in the

U.S. to be 4.4 million in 1900, 7.4 million in 1910, 12 million in 1920, and 18 million in

1928.

While we don’t have an estimate of the shareholder base in the U.S. or other

countries for 1850 and the other years prior to 1900, the above cited statistics suggest a

general development process from 1800 to 1900. Prior to the railroad boom in the 1860s,

the U.S. stock market was probably “local” to New York, Boston, Philadelphia and the

surrounding areas. Significant share ownership expansion into other geographical areas

took place during and after the 1860s. It was the period of the late 19th century and early

20th century that transformed the U.S. stock market from one of relatively narrow

participation to that of wide participation. By 1900, the “public interest” represented by

the stock market included not only the financial interests of the 4.4 million shareholders,

but also those of the whole American economy. In 1929, there were over 300,000 non-

financial corporations in the U.S., but the 200 largest public corporations represented

49.2% of total corporate wealth (Berle and Means 1933, page 33).

From late 19th century to early 20th century, “a society in which production is

governed by blind economic forces is being replaced by one in which production is

carried on under the ultimate control of a handful of individuals. The economic power in

the hands of the few persons who control a giant corporation is a tremendous force which

can harm or benefit a multitude of individuals, affect whole districts, shift the currents of

trade, bring ruin to one community and prosperity to another. The organizations which

they control have passed far beyond the realm of private enterprise-they have become

more nearly social institutions. Such is the character of the corporate system ...” (Berle

and Means 1933, page 46). Viewed in this context, the occurrence of investigative

reporting and Ida Tarbell’s work on Standard Oil around 1900 was inevitable. The

responsibility and roles of the business media rose to a level comparable to those of the

16

political press. This is why today freedom of the business press is as important as

freedom of the political press.

Indeed, as noted above, the business press and the general press experienced fast

development from late 19th century to the present. In 1783, there were 43 newspapers in

the U.S. In 1814, the number increased 346. By 1880, there were 11,314 newspapers.

Today, with the internet and TV media, there are so many traditional and new outlets that

it is impossible to count them. As the demand for business information increases, the

supply of information and news grows. A key milestone in the history of American

financial journalism was the setting up of a Wall Street news letter by Charles Dow and

Eddie Jones in 1882, which became the Wall Street Journal in 1889. While general

journalism reached a level of maturity by the 1910’s, the twentieth century witnessed

further expansive growth in the business media and many of the well known financial

newspapers and magazines came into existence during this period: Financial World

magazine (1902), Nation’s Business (1907), Forbes (1917), Barron’s (1921), The

Business Week (1929), Fortune (1930), The Kiplinger Magazine (1947), Money magazine

(1972), Financial News Network (FNN, 1981), Investor’s Business Daily (1984), CNBC

(1989) and CNNfn (1995). The business media today is as much part of the public’s daily

life as the political media. Whether the media are given the highest level of protection of

their speech right is indeed an issue of great public interest.

While the discussion in this section has exclusively focused on the U.S. and U.K.

experiences, development processes for both markets and business journalism must have

been similar in response to technological changes and expanded opportunities, though the

processes may have taken place at a later time especially in developing countries. For

example, in China, newspapers started in Shanghai in the 1850s after the Opium Wars,

but over the next century the distribution of the print press did not expand much beyond

large to mid-size cities as the general literacy level was not high until later years.

However, over the last two decades, the economic reforms and the building of a nation-

wide highway network (plus the railroad system and air transport) have truly integrated

different regions of China into one national market. Thus, like in other countries, the

demand for independent, unbiased business information has risen tremendously in China.

During this period, especially after the stock market was started in 1990, the financial and

17

business press has had a fast growth. But, before the roles of the business press can be

fulfilled, freedom of the press is still the toughest challenge in China.

2. Modes of Control of the Business Media Government regulations and censorship of the media are as old a topic as the idea of

press freedom. The Licensing Act of 1685 in Britain and the criminal prosecution of John

P. Zenger in 1734 were early examples of legislative and political efforts to crack down

on press speech rights and publications. While the degree of government regulation on

media and the methods used differ today from country to country (in most cases the

methods of control are more subtle today), there are still countries like China and North

Korea where censorship is as blunt and explicit as ever in any country, including strict

licensing, ideological background screening and approval of editors and other media

personnel, direct content control, and jailing of journalists for dissident speeches or

expressions. These may seem to concern only political expressions and political news. In

reality, state-owned enterprises and state-owned banks and other financial institutions are

still common in both developing and developed countries. Thus, investigative reporting

on these enterprises and financial institutions should be in the realm of business news and

commentaries, but it borders with politics as such stories can easily touch upon

bureaucrats and political power. There are many cases that mix business matters with

politics.

As an example, Haier Corporation is one of the largest state-owned enterprises

(SOEs) in China. It is publicly traded (though majority state-owned) and makes electric

appliances such as air conditioners and refrigerators. For many years, the Chinese

government has tried to make Haier a model corporation for other SOEs to follow and a

national symbol of economic might with substantial international market share in several

electronic products. In recent years, Haier has expanded beyond electronic appliances and

into real estate, financial services and investment banking, and many other areas. Its CEO

takes pride in being referred to as the “Jack Welch of China”. In early 2002, security

analysts and business journalists started to question the economic soundness of Haier’s

“expansion at whatever costs” strategy. However, based on this author’s conversations

with journalists in China, the Communist party propaganda department and securities

18

market regulators ordered newspapers and magazines to not publish negative stories

about Haier.

A second mode of control is through media ownership by the state or by a family.

In their path-breaking work, Djankov et al (2001) have shown, based on a sample of 97

countries, that almost universally the largest media firms are controlled by the state or by

private families and that government ownership is more pervasive in broadcasting than in

the print media. Their data also demonstrates that government ownership is associated

with less press freedom and inferior governance. Therefore, private media ownership and

a non-concentrated media industry are more conducive to the free flow of information

and the free expression of opinions about a corporation and its business practice. Lee

(1976) also examines how the organization of a media business and the

“industrialization” of media affect freedom of the press.

Another route to control or suppress media speech is through libel and

defamation litigation against the media. As more countries are reforming towards the rule

of law, naked censorship and media regulations are fading away globally. The new

favorite approach is to take the media to court. This method of “going after” the media is

a particularly serious threat to the business press. In general-interest or political reporting,

the target being reported may be an individual (private person or a politician) who may

have to draw from his/her own personal wealth to litigate, which in most cases tends to

reduce the likelihood of a defamation suit (unless the person feels terribly wronged).

Thus, natural persons present a more limited threat to press freedom. However, in

investigative business reporting, the target being reported is likely a business corporation

with much more financial resources at its disposal. It is therefore important that proper

legal devices and procedural rules are in place to protect both the media’s speech right

and the public interest represented in business reporting.

In the U.S., the “public figure” and “public interest” defenses established after the

infamous New York Times v. Sullivan case of 1964, Rosenbloom v. Metromedia of 1971

and subsequent cases have shielded the American media from possible abusive

defamation lawsuits (Labunski 1987). That is, if the subject in a disputed report concerns

a matter of public interest or the plaintiff who claims to be injured by the report is a

public figure, then the plaintiff in a defamation/libel case has to bear the burden to prove

19

that (i) there is actual damage caused by the published speech and (ii) there is actual

malice on the part of the media (i.e., the defendant knew the statement was false before

publication or acted in reckless disregard of the truth); otherwise the plaintiff is not

entitled to any recovery of damage even if the published report is false. The fact that

consumer products markets and securities markets are all participated by millions of

consumers and investors ensures that investigative reporting on products, corporate

policy/practice and corporate governance issues is protected by the “public interest”

defense. As a result of the actual damage and the actual malice standards, there have not

been many American corporations suing media for defamation, even though American

financial journalists have been among the most aggressive in investigative reporting,

exposing Enron and WorldCom among other recent scandals.

In typical civil liability litigation (say, the plaintiff alleges to be harmed by the

defendant’s published statement), there are four evidence tests to be passed before any

damage recovery is awarded in court: (i) that the statement is false, (ii) that there is

damage, (iii) that it is the published statement which has caused the damage, and (iv) that

the defendant is at fault. The damage can be actual, intangible, reputational,

psychological, or emotional. The “actual damage” standard means that none of the other

types of damage can be claimed except actual material damage. The “actual malice”

standard is the most extreme form of fault or actual intent to harm, the proof of which is

typically extremely difficult. In this sense, the actual damage and the actual malice

standards after New York Times v. Sullivan have taken the plaintiff’s burden of proof to a

much higher level and hence afforded the media substantially more protection in the U.S.

than before, at least when the disputed publication concerns public interest or when the

plaintiff is a public figure.

However, besides the U.S., no other country has adopted the actual damage and

the actual malice evidence standards to protect the free flow of information and freedom

of the media. In many countries, strict liability is practiced so that as long as the falsity of

the published statement is proven by evidence, damages, causality and fault are

automatically assumed (i.e., because the statement is negative, there must be reputational

and emotional damages caused by it, and because a false statement is published the press

must be at fault) and a damage award is then decided by the judge. Such a practice has a

20

detrimental impact on the business media’s willingness to investigate and report on

corporate corruption and wrong-doing and leads to self-censorship.

In a famous case in China, Caijing magazine (a business and finance publication)

published on March 5, 2002 an investigative report on the financial accounting and

disclosure practice by a publicly traded corporation, Shenzhen Fountain. After

conducting a detailed analysis and many on-site interviews with witnesses, the magazine

concluded that Shenzhen Fountain fabricated hundreds of millions of dollars of profits

over the prior three years and reported to the investing public as such, committing Enron-

style financial fraud. On March 6, the next day after the article was published, Shenzhen

Fountain filed a defamation suit in a local court against Caijing magazine and its reporter,

seeking a damage recovery of a half million yuan. The entire complaint which triggered a

year-and-a-half long litigation process had only 7 sentences, with no supporting evidence

other than a copy of the article and the plaintiff’s claim that the publication was false and

hence there was damage to the company’s reputation.

Right away, Caijing magazine hired two law firms to prepare for a legal defense.

After a half-day court hearing on June 6, 2002, the judges in Shenzhen ruled against

Caijing and awarded 300,000 yuan of damage to the corporate plaintiff (Tschang 2002).

The main basis for the court to rule against the magazine was that its reporter misplaced a

real estate project’s completion date (the project was reported to have been completed by

1997, instead of the actual completion year 1998), which affected to which year the

project’s costs were allocated and hence impacted the profit/loss numbers for the two

years. The reporter testified and demonstrated that he interviewed nearby neighbors by

the project site to verify the dates, and that he was diligent in verifying the dates. Also,

after the Caijing article came out on March 5, Shenzhen Fountain’s stock price went up

by 6% on that day and another 8% on the following day. From March 5 to the end of the

month, its stock price went up by 16% (Chen 2002). In fact, the stock’s trading volume

rocketed from about 2.5 million shares on March 4 to more than 22 million shares by

March 8. The article caused a significantly positive impact on Shenzhen Fountain’s stock.

So, there was no evidence of damages to the plaintiff corporation. Nonetheless, as soon

as the falsity of the real estate project’s completion date was established, the court

automatically concluded that there was reputational damage caused by the article to the

21

plaintiff and that it was the magazine’s fault, both claims of which were hard for the

defendant to reject with evidence when the Chinese court does not follow any concrete

standards like “actual damage” and “actual malice”. In the context of the corporate

governance debate, such loose legal practice in defamation litigation puts the business

media at a severe disadvantage. Caijing appealed to the higher court in Shenzhen, but late

in 2003 the appeals court kept the lower court’s judgment intact.

Immediate consequences of the Caijing case were many. First, at least four other

companies that were reported by Caijing in a negative light files defamation claims in

court. Second, Caijing and other business media in China moved to practice more self-

censorship to avoid such lengthy and costly litigations. For months, Caijing and its staff

had to prepare for the litigation and were distracted from its editorial and journalist work.

After the June 5 ruling, the managers at Caijing expressed their wish to minimize future

defamation litigation, implying that the magazine has to be less aggressive in

investigative reporting. Third, once other corporate entities and individuals realized that it

took only a 7-sentence complaint to take a magazine to court, many decided to take

advantage of the litigation route to suppress media reporting. For example, in August

2002, Haier Corporation sued a security analyst for a published research report that

questioned its at-whatever-cost business expansion strategy.13 In that case, Haier’s court

complaint was even shorter: three sentences. While the plaintiff in a defamation case has

to make virtually no effort in litigation preparation in China, the media defendants have

to agonize and bear all the burden of proof. Effectively, the media defendants are

presumed to be liable unless they can prove that there is no damage or fault. Such

evidence and procedural rules favor the plaintiff and are geared completely against the

media defendants. In an empirical study of media defamation cases in China, Chen (2004)

shows that media defendants lose 69.2% of the time in court rulings on average,

compared to the appropriately 8% loss frequency for American media defendants.

Libel law in Britain does not give business media as much protection as in the U.S.

It wasn’t until 1993 when the House of Lords ruled that government bodies cannot sue

for defamation. But, any corporation can bring defamation proceedings against a

publication if and when it considers the publication to have damaged its business or

13 See Lawrence (2002) for a cover story report on the case and related issues.

22

trading reputation. The same legal and evidence standards as in general civil litigation

apply to speech-based defamation proceedings, and no clear distinction is made for cases

in which the words complained of concern public interest or public figures. In a recent

high-profile case in Britain, in March 2004 investment banking firm Collins Stewart

Tullett sued the Financial Times for damages of £128 million initially, but raised to £240

million in August 2004 (a new record ever in an English court), for alleged libel. The

article complained of in the case was published in August 2003 in which the Financial

Times reported allegations made by a former employee of the investment bank that

Collins Stewart committed “serious regulatory breaches,” which the bank denied. The

bank claimed that the negative reporting caused some institutions to stop dealing with the

firm, leading to business losses, and that as a result the bank’s share price suffered large

losses. In the litigation, one of the disputed points was the damage assessment of £240

million which the plaintiff bank claimed to be based on its share-price decline of 15%

from the libelous story’s publication date of August 27, 2003 to the end of that month.14

That report by the Financial Times did lead to a 12-month long investigation of

Collins Stewart by the Financial Services Authority (the British securities market

regulator), though the investigation was officially closed in August 2004 without any

material findings of wrong-doing. Rather than the falsity issue of the published

allegations, the legal contention then focused on the “damage” and the “fault” elements.

FT argued for no fault on its part by showing that its story was based on court documents

filed by the bank’s former employee against the bank and that its story was a balanced

one. FT also contested the use of Collins Stewart’s stock price decline for its special

damages claim. While the legal proceedings are still going on for this case, its outcome

could have chilling effects on business reporting as well as on financial conditions of

media companies.

In Australia, the States and Territories have refused to allow corporations to

utilize the civil law of defamation to sue for damages and to protect their corporate

reputation. Recently, there is a heated debate in which the Federal Attorney-General has

been pressuring the States to change their stance, otherwise he would push ahead with a

federal legislation to impose a uniform national code allowing companies to sue for

14 Treanor (2004) reports on this story.

23

defamation.15 With the on-going change in the federal government’s position on this

issue, the largest logging company in Australia, Gunns Ltd., is testing the boundaries by

filing a defamation action against 20 environmental activists for damages of over 6

millions Australian dollars, alleging that the defendants’ campaigns (including statements

made in the media) and protests have defamed the company and damaged its business

interests (Duffy 2005). The action was filed in December 2004 and the case is on-going.

A similar, but unprecedented, legal contest occurred in the U.S., in which a

defamation lawsuit was filed in December 2003 by Cintas, a NASDAQ stock with $6.6

billion market capitalization, against investment firm Walden Asset Management and its

senior vice president, Tim Smith. The defamation complaint centered around remarks Mr.

Smith made at the October 2003 annual shareholders meeting of Cintas, where he

introduced a resolution asking Cintas to assess the efficacy of its Code of Conduct in

preventing sweatshop labor in countries where it sources. In its legal complaint, Cintas

denied all of his allegations and charged Mr. Smith with defamation for knowingly

disseminating "false" information (Baue 2004). The case was later settled by the two

sides. While the statements complained of were expressed at a shareholder meeting and

not on a print medium, the case set a bad precedent in which not only the free speech

rights of a shareholder were challenged by a corporation, but also much doubt was cast

on how corporate governance can be effectively conducted if corporations become more

aggressive in their use of defamation actions.

There are more cases around the world in which corporations have taken the legal

route to challenge the business press and general media for defamation. As another

example, the National Bank of Mexico (Banamex) has for several years filed criminal

libel actions against Por Esto (a Mexican daily) first in 1997 and then again in 2000. The

actions were based on an investigative report suggesting that the bank’s majority owner

had engaged in drug trafficking. The Mexican court in each case ruled for the newspaper

defendants. In 2001, the bank took the Mexican journalists and a New York based

website to court in New York, alleging that the defendants defamed the bank and its

15 See a recent report by ABC Online report, Tanya Nolan, “Ruddock in favour of enabling companies to sue for defamation,” at www.abc.net.au/am/content/2005/s1327905.htm , March 21, 2005.

24

majority owner through the articles posted on the New York website, though the articles

were written, translated into English, and uploaded on the website from Mexico.16

With the advent of the internet and TV, the business media in each country are

now able to reach far larger audiences than ever before. In case a media publication

contains false statements or misleading news, the sense of injury and the magnitude of

financial damages that can be experienced by the subject corporation can be materially

different than ever before, to say the least. For this reason, there seems to be an

increasing trend for corporations to sue the media for defamation. Given the public

interest at stake in a globalized economy, courts across countries may need to change

their procedural and evidence rules to weigh more on the side of media freedom, by

giving the media the privilege to use the “public interest” and “public figures” defense.

3 Data Description

Our empirical work is limited by data availability in the sense that we will try to use as

large a cross-country sample, and as long a time-series data, as possible. A key

explanatory variable for this paper is the degree of press freedom. Speech freedom of a

country’s informational institutions is measured by the press freedom rating provided by

Freedom House. The press freedom rating is an index that reflects the “degree to which

each country permits the free flow of information” (Press Freedom Survey 1999).

Starting in 1980, Freedom House has conducted this survey each year. In their original

data, the ratings are on a scale of 1 to 100, with a lower rating representing a more free

press. To avoid confusion, we have converted the rating scores by subtracting 99 from the

original rating, so that “the higher the rating, the more free and hence the better”. In

particular, we will mainly use the press freedom ratings of year 1990, denoted by

Press90. From Table 1 and based on a sample of 108 countries, the average rating in

1990 is 54.36 with a standard deviation of 23.29, the lowest of 1 and the highest of 93.

To get a sense of how much countries may have changed from the earlier years,

we collected the 1972 press freedom ratings conducted by the Freedom of Information

16 See Sean Dodson, “Hacks hit in drugs war,” the Guardian, June 25, 2001.

25

Center at the School of Journalism at the University of Missouri and reported in Table 2.7

in Taylor and Hudson (1972). For this early survey, the ratings range from -3.5 to 3.5,

again with a higher rating indicating a more free press. Table 2 lists 13 countries that are

in both the 1972 and the 1990 samples and that are either in the lowest quartile based on

the 1972 ratings, or in the top quartile in 1972 but had since declined in press freedom

ratings. Note that China, Indonesia, Pakistan and Thailand had not improved their

relative press freedom standing between 1972 and 1990 (remaining in the most non-free-

press group), whereas the Philippines and Peru had dropped from the top quartile to the

lowest and the Netherlands from the top to the third quartile. Most other countries had

moved from year to year, but not dramatically. As is known, most reforms and market

liberalization efforts took place in the 1990’s around the world. These reforms have

increased press freedom levels in many countries.

Since our goal is to employ institutional and economic variables to explain cross-

country growth differences in various industries, we should use “initial” values of the

explanatory variables in the predictive regressions, so as to minimize the inference

difficulty regarding causality and related to endogeneity. Thus, for our analyses, we will

not use the press freedom ratings after 1990. Though we could use the 1972 press

freedom ratings to explain the growth differences in the later years, the 1972 sample size

is much smaller than the 1990 sample. Consequently, we choose to use the 1990 value of

each explanatory variable as its initial value in our regressions. Another reason for

focusing on the 1990-2000 period is that for earlier years the data for industry values

added are not available for many countries. Our regression analyses will be based on the

growth rate in industry values added from 1990 to 2000.

To measure the degree of development across sectors in each country, we use the

Economist Intelligence Unit (EIU) sector value-added time-series from 1990 to 2000, for

82 countries. This dataset is based on the three traditional sector classifications: primary

sector (agriculture, forestry, fishing and mining), the secondary sector (industry) and the

tertiary sector (services).

To refine our analyses to an industry level, we use the industry value-added time-

series data for each country from 1990 to 2000, where the industries are determined

based on the International Standard Industrial Classification (ISIC). The data source is the

26

United Nations Statistics Division Common Database. This is also the source for our

GDP and per-capita GDP data for each country.

Country data for the property rights index are from the database put together by

La Porta, Lopez-de-Silanes and Shleifer (2002). The law and order index for 1990 is

provided by International Country Risk Data (http://www.countrydata.com)

Table 1 presents summary statistics for the explanatory variables used in the next

section. As expected, press freedom rating, property rights index, law and order rating

and per-capita GDP are correlated with each other. Institutional variables are correlated,

which tends to make causality inferences between them and macroeconomic variables

ambiguous and difficult.

4. Empirical Analyses

As discussed in the introduction section, the free flow of information and opinions will

ultimately determine the degree of information asymmetries in the market place, which in

turn dictates the extent to which a given market/industry can develop. The higher the

degree of information asymmetries, the more the industry is subject to the Akerlof (1970)

adverse-selection and the Arrow (1978) moral hazard problems and hence the harder it is

for the industry to grow. To construct a reliable test of this hypothesis, we form industry

pairs in which one industry faces less information asymmetry than the other, because the

former produces and trades “tangible” goods whereas the latter industry produces and

trades “intangible” services. If the above sequence of reasoning is consistent with

economic data, our first testable hypothesis is that controlling for other factors, countries

with a free press have a better developed service sector (in particular a better developed

financial services industry) than countries with a less free press. Our second testable

hypothesis is that countries with a less free press can grow its manufacturing and like

industries faster than its financial services industry, whereas the opposite is true for

countries with a more free press.

Our goal is to link the service sector’s development and cross-industry growth

differences to the initial level of press freedom in a country, by controlling for other

initial institutional and economic variables. For example, rich and poor countries can

27

afford different development potentials. The low per-capita GDP in poor countries offers

them labor-cost advantages, giving them better opportunities to develop labor-intensive

manufacturing and agricultural industries. Rich countries should have more potentials in

their services industries and they can develop better institutions as well, which should in

turn give them a better chance to grow financial services and the like (e.g., a higher

income country tends to have greater demand for financial markets). To control for such

initial differences, we include the 1990 per-capita GDP of each country as a control

variable.

Numerous measures of institutional quality were considered in our study, but our

focus in the discussions to follow is on the following two variables: law and order ratings

(i.e., rule of law) and property right protection, each as of 1990. When we included a

government quality index and other institutional variables, our results did not change

much as these variables may have been proxied by the ones we have.

4.1 Explaining Cross-Sector Development

We start with the three sectors as classified in the traditional way: agriculture, industry,

and services. This is a rough cut of the industry structure, but serves our initial purpose.

In Table 3, we first regress across countries the log of 1995 per-capita sector value added

on the 1990 values of the explanatory variables. In explaining the 1995 service sector

value added, a country’s initial per-capita GDP and press freedom rating are statistically

significant and both have a positive impact on the future level of service sector

productivity: rich countries and free-press countries tend to have a better developed

service sector. Law and order is also significant, but it has the opposite sign relative to

what we would expect: higher law and order means a lower per-capita service sector

value added. A possible reason is that because press freedom and law and order have a

correlation of 0.63, having both in the cross-country regression may affect the sign of the

law and order variable. The property rights variable is insignificant in predicting future

service sector development.

In predicting the future development level of a country’s industrial sector (as

measured by its per-capita value added), only the initial per-capita GDP is significant and

28

positively related. In this case, though statistically not significant, the coefficient on 1990

press freedom rating is negative in all the cross-country regressions in Table 3: after

controlling for each country’s beginning income level (1990 per-capita GDP) and law

and order, countries with a free press tend to focus less on the industrial sector than the

service sector while the opposite holds for countries with less press freedom. These

results are consistent with our basic hypothesis in the paper.

Figure 3 displays the relationship between future service sector development and

initial press freedom, after controlling for beginning per-capita GDP and law-and-order

levels. Figure 4 does that for the per-capita industrial sector value added. The charts serve

to illustrate the results in Table 3.

Another measure of the development level of a country’s service sector is the

service-sector value added as a percentage of its GDP. Using the 1995 service-sector

share in a country’s 1995 GDP as a dependent variable, we run cross-country initial-value

regressions and report the results in Table 4. While confirming the results in Table 3,

Table 4 shows that the initial press freedom level is significant in explaining both the

service-sector and the industrial-sector shares in the GDP, with signs consistent with the

prediction of our hypothesis. The property rights index is not statistically significant in

predicting future development levels by the service sector or the industrial sector, but its

coefficient sign is consistent: future service-sector share in GDP is positively related to

the initial property rights index, whereas future industrial-sector share is negatively

related to the latter.

Since service-sector activities today are in general more profitable (and hence

offer more values added) than industrial activities (because of the maturity of industrial

technologies), countries with better press freedom and better property-rights regimes tend

to be able to engage in higher value-added activities in the value chain than countries

without such institutions. One may say that countries without such institutions are likely

to be poor countries with lower labor costs, and hence they engage in low value-added

manufacturing projects. While this may be true, we have controlled for the labor cost

level of each country by the initial per-capita GDP. Therefore, labor cost cannot be

capturing what press freedom and property rights index are reflecting.

29

As is well known, regression results based on institutional and macroeconomic

variables tend to be ambiguous and hard to interpret when it comes to drawing inferences

on causality (Djankov et al 2001). This is why we chose to lag the control and

explanatory variable values by 5 years (explanatory variables as of 1990 and dependant

variables as of 1995). This choice helps make the causality inference less ambiguous than

when the dependent and independent variables are contemporaneous. Still, even if the

press freedom variable is not the true cause of better service sector development and it

proxies for some unobserved but more important exogenous variable, we can at least say

that countries with a better developed service sector tend to be associated with a free

press and with uninhibited flow of information. This suggests that countries that desire to

develop their service sector more fully and that don’t yet allow the free flow of

information or free expression of opinions should perhaps first relax their informational

environment, so as to create market and social conditions that are typical of economies

with a well developed service sector.

4.2 Explaining Cross-Industry Growth Differences

To conduct more robust tests on the causality between press freedom and service

sector development, we can nonetheless follow the innovative empirical method of Rajan

and Zingales (1998). That is, as discussed before, the manufacturing industry and

financial services depend on the free flow of information and other institutional factors to

substantially different degrees. Therefore, if the informational environment truly

determines the extent to which an information-asymmetry sensitive industry can

ultimately grow, we should find that after controlling for other initial factors, countries

with more free informational institutions can develop their information-sensitive services

industries faster than the less information-dependent industries. Such a test design allows

us to avoid the impact of reverse causality and simultaneity on our causality inferences

between press freedom and service sector development.

In Table 5, we contrast the growth rates over the period from 1990 to 2000

between (i) the service and the agriculture sectors and (ii) the service and the industrial

sectors. Compared to the service sector, both agriculture and industries are less dependent

30

on the free flow of information. In fact, in predicting future growth-rate differences

between service and agriculture, only initial press freedom is statistically significant at

the conventional 5% confidence level. Not even the initial per-capita income level is

significant. The same result holds when the dependent variable to be explained is the

future growth difference between service and industry, except that now the initial law and

order is marginally significant but with an inconsistent sign (negative). Therefore, during

the 1990-2000 period, initially rich countries did not necessarily experience faster service

sector growth than industrial sector growth. A more important predictor for faster service

growth than industrial growth was the beginning level of information freedom. Figures 5

and 6 respectively demonstrate the adjusted growth-rate difference (after adjusting for

initial per-capita GDP and law and order) between (i) service and agriculture and (ii)

service and industrial sectors.

To refine the cross-industry contrast, we construct five industry pairs, each with

the financial services industry in one of the pair. The other industries separately used in

the pairing are (i) agriculture, hunting, fishing and forestry, (ii) manufacturing, (iii)

utilities, (iv) wholesale, retail, hotels and restaurant services, and (v) transportation,

storage and telecommunications. We postulate that all of these five industries are less

information-dependent than financial services.

Table 6 presents all the predictive regression results, with Figures 7 and 8

showing the relationship between the adjusted growth-rate difference and initial press

freedom for two industry pairs. The basic results using the refined industry classifications

are similar to what we have seen based on the sector pairs in Table 5: initial press

freedom is the only significant predictor of future growth-rate difference between

financial services and a less information-sensitive industry. One exception is when we

contrast financial services with manufacturing, where rich and free-press countries lead to

faster growth in financial services than in manufacturing. But, in this case, better law and

order and better property rights seem to imply lower relative growth in financial services

than in manufacturing, a contradictory result to our initial conjecture. This finding is

puzzling.

5. Conclusions

31

Using a cross-section of 82 countries, we have shown that after controlling for initial

income and other institutional qualities, the initial condition of press freedom in a country

seems to explain why some countries have high growth in the service sector (especially

financial services) and why other countries may only be able to rely on manufacturing

and other tangible or must-have industries to develop their economies. Oil-rich middle-

eastern and Latin-American countries may have high income per capita because of their

abundant natural resources, but high per-capita GDP does not imply they have more

developed service sectors. Similarly, countries like China have been able to increase its

per-capita GDP from growing manufacturing and other “hardware” industries, but have

not been able to take full advantage of the financial and other services growth potential

created therein because of the inhibited information flow and the restricted expression of

opinions. The lack of press freedom or free flow of information leads to a build-up of

information asymmetries in markets, which in the long run creates an opaque social and

economic environment where trust in what you see, read or trade becomes the scarcest

thing. For example, in China today, deciding whether to give to a seemingly handicapped

beggar on the street is not as easy as it seems, because you cannot be sure whether the

beggar is as handicapped as he seems. In a society where information flow is always

filtered or censored, you cannot trust the truthfulness or completeness of the information

you do have access to.

In such an opaque market environment, consumers and investors hedge their

information risk and transaction risks by avoiding the intangibles (e.g., financial markets)

and focusing on the tangible goods and investment markets. For example, as an

investment instrument, real estate is a tangible one whereas stocks and mutual funds are

not. Therefore, in China, besides the booming tangible consumer goods markets, real

estate properties have become a much more preferred investment vehicle than the stock

and other financial markets. Tangibility has seemed to be a key characteristic that

consumers and investors use to mitigate information risk. From a government policy-

makers’ perspective, if a country cannot improve its informational institutions in the near

future, its economic development focus should be best on industries that are not so

information-dependent.

32

In a major sense, the empirical exercise in this paper can be viewed as a test of the

central proposition in Akerlof (1970) and Arrow (1978) that too much information

asymmetries lead to market shut-downs. At a macro level, it is hard to measure the

degree of information asymmetry in a country. Press freedom ratings serve as a proxy,

provided that each country has developed a sufficient IT infrastructure, newspapers and

TV media. In this sense, by directly linking information-sensitive industries’

development level to the country’s past press freedom level, we have been able to show

based on cross-country data that indeed countries with more free information flow have

better developed service sectors (including financial services).

As a free press encourages investigative reporting on financial institutions and

financial firms, it serves as an important risk management tool. It makes it possible to

expose a financial situation and pressure the responsible parties to correct it before the

financial problem grows into a crisis. In a follow-up paper, we will specifically address

the issue of financial market development in relation to press freedom.

An important implication of the empirical results is that as the structure of modern

economies becomes increasingly more services-oriented, freedom of the media has

become an ever more crucial economic necessity. As an example, the service sector share

in the U.S. GDP was 70.7% in 2002 (and 68.9% in 1980), whereas its financial services

industry alone contributed 34.9% to the U.S. GDP in 1993. Two centuries ago, the U.S.

was predominantly an agricultural economy (e.g., 70% of total employment was in

agriculture and 15% in industry as of 1820. Maddison 2001) and hence press freedom

was hardly needed to facilitate market development. Even a century ago, the U.S.

economy was comprised of largely “hard” industries and its industry composition was

heavily in agricultural and manufacturing industries (e.g., in 1890, 62% of employment

was in agriculture and industries). It was then starting to need the free flow of

information and the free practice of investigative reporting on businesses. But, that was

no comparison to today’s services-dominated economy in terms of the need for freedom

of the business media (In 1998, 74% of U.S. employment was in the services sector). As

the world economy is moving in this direction, there is much public interest at stake

whether the media’s speech rights are protected in court or not.

33

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37

Table 1. Summary statistics for explanatory variables Press90 is the press freedom rating from 1990. The press freedom rating ranges from 1 to 100 where 1 is the represents the least amount of press freedom and 100 represents the greatest amount of press freedom. Log(gdp90) is the log of per capita GDP in 1990 using 1990 US dollars. Law90 is the law and order rating, it ranges from 1 to 6 where 1 is the least amount of law and order and 6 is the greatest amount of law and order. PropRgt is the property rights index.

Press90 log(gdp90) Law90 PropRgtMean 54.36 7.66 3.07 3.45Median 56.50 7.43 3.00 3.00Std. Dev.

23.29 1.51 1.64 1.06

Min. 1.00 4.58 0.00 1.001st Qtr. 40.00 6.55 2.00 3.003rd Qtr. 73.50 8.88 4.00 4.00Max.

93.00 10.44 6.00 5.00

Obs 108 96 96 106 Correlation among explanatory variables

Press90 log(gdp90) Law90 PropRgtPress90 1.00 0.55 0.63 0.38Log(gdp90) 0.55 1.00 0.66 0.60Law90 0.63 0.66 1.00 0.52PropRgt 0.38 0.60 0.52 1.00

38

Table 2. Select Countries with Significant or No Changes in Press Freedom Ratings Countries included in this table are (i) those in the lowest quartile based on the 1972 press freedom ratings and (ii) those that were in the top quartile (hence with a free press then) in 1972 but have since declined in press freedom ratings. The 1st Quartile is comprised of nations with the lowest press freedom ratings relative to the sample population, and the 4th Quartile of the nations with the highest press freedom ratings. The sample is made up of countries with 1972 press freedom ratings. Note that the 1972 ratings were based on a different numeric system: the lower the rating, the less free its press. Press72 1972 Quartile Press90 1990 QuartileArgentina 0.92 1 71 2China -3.15 1 11 1Czech Republic -2.5 1 80 3Hungary -1.57 1 70 2Indonesia -0.39 1 42 1Pakistan -0.01 1 42 1Poland -2.53 1 70 2Portugal -1.42 1 82 3Spain -0.99 1 86 3Thailand 0.7 1 46 1

Netherlands 3.02 4 86 3Peru 2.76 4 42 1Philippines 2.66 4 45 1

39

Table 3. Press Freedom and Per-capita Sector Value Added. The dependent variable is the log of the per capita 1995 sector value added in 1990 US Dollars. The explanatory variables are: Press90, the 1990 press freedom rating; log(GDP90), the log of the 1990 GDP per capita in 1990 US Dollars, law and order, the 1990 law and order rating; and property rights. The per capita industry sector value added was calculated by multiplying the ratio of total real value added to total GDP by the per capita GDP in 1990 US Dollars. The industry sector value added came from the Economist Intelligence Unit Country Data file. The same applies to the per-capita Service Sector value added data. The per capita GDP in 1990 US Dollars came from the United Nations Common Statistics Database. dependent variable

Service Sector value added per-capita Industry Sector value added per-capita

Intercept -1.3345 -1.2481 -1.3299 -1.2471 -1.8864 -1.8411 -1.9124 -1.8481 T-stat (-10.8530) (-10.3360) (-10.9650) (-10.4580) (-7.8880) (-8.1790) (-7.9930) (-8.1630) P-value [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] Press90 0.0053 0.0041 0.0053 0.0040 -0.0026 -0.0035 -0.0023 -0.0033 T-stat (4.2430) (3.4400) (4.2580) (3.4680) (-1.0770) (-1.5740) (-0.9500) (-1.4950) P-value [0.0001] [0.0009] [0.0001] [0.0009] [0.2850] [0.1200] [0.3450] [0.1390] log(GDP1990) 1.0759 1.0588 1.0826 1.0607 1.1665 1.1559 1.1321 1.1147 T-stat (46.3140) (46.7000) (55.1270) (58.7670) (25.8180) (27.3490) (29.2240) (32.5310) P-value [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] law and order -0.0503 -0.0488 -0.0291 -0.0390T-stat (-2.6050) (-2.6000) (-0.7740) (-1.0530) P-value [0.0111] [0.0112] [0.4410] [0.2960] property rights 0.0163 0.0041 -0.0854 -0.0884 T-stat (0.5600) (0.1430) (-1.5110) (-1.6420) P-value [0.5772] [0.8866] [0.1350] [0.1050] Adj. R-sqr 0.9853 0.9841 0.9855 0.9843 0.9460 0.9463 0.9450 0.9450 Observations 79 81 80 82 79 81 80 82

40

Table 4. Press Freedom and Sector Value Added (Percent of GDP). The dependent variable is the 1995 sector value added as a percentage of total 1995 GDP. The explanatory variables are: Press90, the 1990 press freedom rating; log(GDP1990), the log of the 1990 GDP per capita in 1990 US Dollars, law and order, the 1990 law and order rating; and property rights. Other data are as described in Table 3. dependent variable

Service Sector Value Added as a Percentage of GDP in 1995 Industrial Sector Value Added as a Percentage of GDP in 1995

Intercept 0.1661 0.1893 0.1712 0.1898 0.1292 0.1288 0.1238 0.1271 T-stat (3.3470) (3.9950) (3.4450) (4.0100) (2.2270) (2.3670) (2.1390) (2.3380) P-value [0.0013] [0.0001] [0.0009] [0.0001] [0.0290] [0.0204] [0.0357] [0.0219] Press90 0.0022 0.0018 0.0021 0.0018 -0.0016 -0.0016 -0.0015 -0.0016 T-stat (4.2710) (3.9180) (4.1790) (3.9260) (-2.6870) (-3.0770) (-2.5770) (-3.0060) P-value [0.0001] [0.0002] [0.0001] [0.0002] [0.0089] [0.0029] [0.0119] [0.0036] log(GDP1990) 0.0320 0.0272 0.0374 0.0327 0.0439 0.0435 0.0361 0.0351 T-stat (3.4140) (3.1980) (4.6410) (4.5630) (4.0010) (4.2570) (3.8480) (4.2670) P-value [0.0010] [0.0030] [0.0000] [0.0000] [0.0001] [0.0001] [0.0002] [0.0001] law and order -0.0132 -0.0108 -0.0006 -0.0025 T-stat (-1.6940) (-1.4080) (-0.0620) (-0.2750) P-value [0.0945] [0.1631] [0.9505] [0.7840] property rights 0.0141 0.0118 -0.0190 -0.0180 T-stat (1.2050) (1.0440) (-1.3890) (-1.3840) P-value [0.2321] [0.2998] [0.1691] [0.1703] Adj. R-sqr 0.4878 0.4755 0.4844 0.4771 0.1693 0.1829 0.1597 0.1737 Observations 79 81 80 82 79 81 80 82

41

Table 5. Press Freedom and Sector Growth Rate Differences. The dependent variable is the growth-rate difference between two sectors, where the geometric average growth rate of the per capita sector value added between 1990 and 2000 is used for each sector. The geometric average growth rate was calculated by taking the log of the latest per capital sector value added minus the log of the earliest per capita sector value added, divided by the number of years between the latest and earliest data points. Countries with less than 5 years of observations were removed from the data set. The explanatory variables are: Press90, the 1990 press freedom rating; log(GDP1990), the log of the 1990 GDP per capita in 1990 US Dollars, law and order, the 1990 law and order rating; and property rights. dependent variable

Growth-rate Diff. between Services and Agriculture Sectors Growth-rate Diff. between Services and Industry Sectors

Intercept 0.0066 0.0145 0.0061 0.0136 -0.0408 -0.0299 -0.0405 -0.0294 T-stat (0.3160) (0.7070) (0.2910) (0.6610) (-2.5290) (-1.8820) (-2.5330) (-1.8610) P-value [0.7531] [0.4820] [0.7722] [0.5107] [0.0136] [0.0637] [0.0134] [0.0665] Press90 0.0005 0.0004 0.0005 0.0004 0.0004 0.0003 0.0004 0.0003 T-stat (2.4170) (1.9090) (2.4700) (2.0310) (2.6780) (2.0510) (2.6420) (1.9640) P-value [0.0181] [0.0600] [0.0158] [0.0456] [0.0091] [0.0436] [0.0100] [0.0530] log(GDP1990) 0.0002 -0.0019 -0.0017 -0.0031 0.0032 0.0010 0.0042 0.0018 T-stat (0.0470) (-0.4990) (-0.4860) (-0.9840) (1.0550) (0.3410) (1.6310) (0.7520) P-value [0.9623] [0.6200] [0.6281] [0.3283] [0.2949] [0.7342] [0.1071] [0.4541] law and order -0.0040 -0.0036 -0.0049 -0.0049 T-stat (-1.2100) (-1.1040) (-1.9160) (-1.9950) P-value [0.2302] [0.2730] [0.0592] [0.0497] property rights -0.0038 -0.0027 0.0021 0.0017 T-stat (-0.7750) (-0.5440) (0.5590) (0.4470) P-value [0.4407] [0.5880] [0.5782] [0.6558] Adj. R-sqr 0.0363 0.0133 0.0389 0.0261 0.1069 0.0678 0.1143 0.0716 Observations 78 80 79 81 79 81 80 82

42

Table 6. Press Freedom and Relative Industry Growth The dependent variable is the difference between two industries (by ISIC) in geometric average growth rate of per capita industry value added from 1990 to 2000. The geometric average growth rate was calculated by taking the log of the latest per-capita industry value added minus the log of the earliest per-capita industry value added, divided by the number of years between the latest and earliest data points. Countries with less than 5 years of observations were removed from the data set. Different industry pairs are considered in this table. The explanatory variables are: Press90, the 1990 press freedom rating; log(GDP1990), the log of the 1990 GDP per capita in 1990 US Dollars, law and order, the 1990 law and order rating; and property rights. The per capita industry value added was calculated by multiplying the ratio of total real value added to total GDP by the per capita GDP in 1990 US Dollars. The industry value-added data came from the United Nations Common Statistics Database, the United Nations National Accounts Yearbook and the OECD STAN Industry Database. Panel A; Financial Services minus Agriculture, and Financial Services minus Manufacturing dependent variable

(Financial Intermediation, Real Estate, Business Services – Agriculture, Hunting, Fishing, Forestry)

(Financial Intermediation, Real Estate, Business Services – Manufacturing)

Intercept -0.0176 0.0019 -0.0135 0.0020 -0.0486 -0.0144 -0.0491 -0.0077 T-stat (-0.4330) (0.0550) (-0.3370) (0.0570) (-1.4110) (-0.4820) (-1.4050) (-0.2520) P-value [0.6663] [0.9567] [0.7371] [0.9548] [0.1633] [0.6315] [0.1649] [0.8020] Press90 0.0009 0.0008 0.0009 0.0008 0.0008 0.0007 0.0007 0.0005 T-stat (2.2440) (2.1160) (2.4260) (2.3180) (2.5700) (2.2190) (2.1100) (1.6110) P-value [0.0285] [0.0383] [0.0182] [0.0236] [0.0127] [0.0301] [0.0389] [0.1120] log(GDP1990) 0.0029 -0.0010 0.0025 -0.0007 0.0124 0.0063 0.0081 -0.0002 T-stat (0.3880) (-0.1530) (0.3700) (-0.1260) (2.0020) (1.1700) (1.3820) (-0.0320) P-value [0.6996] [0.8792] [0.7128] [0.9004] [0.0499] [0.2463] [0.1720] [0.9740] law and order -0.0064 -0.0051 -0.0093 -0.0110 T-stat (-1.0620) (-0.8700) (-1.8330) (-2.1900) P-value [0.2927] [0.3876] [0.0718] [0.0323] property rights 0.0017 0.0010 -0.0139 -0.0154 T-stat (0.2060) (0.1270) (-2.0420) (-2.3700) P-value [0.8371] [0.8997] [0.0456] [0.0209] Adj. R-sqr 0.0717 0.0716 0.0850 0.0896 0.1226 0.0969 0.0805 0.0294 Observations 65 67 66 68 65 67 66 68

43

Panel B of Table 6; Financial Services minus Utilities; and Financial Services minus Commercial, Hotels and Restaurants dependent variable

(Financial Intermediation, Real Estate, Business Services – Electricity, Gas, Water)

(Financial Intermediation, Real Estate, Business Services – Wholesale, Retail, Hotels, Restaurants)

Intercept -0.0753 -0.0863 -0.0767 -0.0878 -0.0454 -0.0284 -0.0433 -0.0261 T-stat (-2.0480) (-2.7520) (-2.1290) (-2.8530) (-2.0780) (-1.4550) (-1.9870) (-1.3500) P-value [0.0451] [0.0078] [0.0373] [0.0059] [0.0419] [0.1505] [0.0512] [0.1816] Press90 0.0007 0.0008 0.0007 0.0008 0.0006 0.0004 0.0005 0.0004 T-stat (1.9500) (2.2640) (1.9970) (2.3270) (2.7530) (2.1490) (2.5530) (1.9830) P-value [0.0560] [0.0272] [0.0504] [0.0232] [0.0078] [0.0355] [0.0131] [0.0516] log(GDP1990) 0.0014 0.0033 0.0022 0.0048 0.0066 0.0029 0.0045 0.0009 T-stat (0.2020) (0.5510) (0.3520) (0.9890) (1.6420) (0.8230) (1.2120) (0.2950) P-value [0.8404] [0.5839] [0.7257] [0.3263] [0.1057] [0.4135] [0.2301] [0.7687] law and order 0.0043 0.0041 -0.0057 -0.0058 T-stat (0.7970) (0.7870) (-1.7690) (-1.8360) P-value [0.4288] [0.4343] [0.0820] [0.0711] property rights 0.0012 0.0031 -0.0052 -0.0047 T-stat (0.1560) (0.4260) (-1.1790) (-1.0970) P-value [0.8763] [0.6714] [0.2431] [0.2769] Adj. R-sqr 0.1649 0.1629 0.1772 0.1734 0.1257 0.0788 0.1172 0.0784 Observations 63 65 64 66 66 68 67 69 Note: For Financial Intermediation, Real Estate, Business Services minus Electricity, Gas, Water, Iraq was removed from the data set. After the 1991 Gulf War the country’s electricity, gas and water industries were devastated and international trade sanctions made it difficult for the country to rebuild its infrastructure.

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Panel C of Table 6: Financial Services minus Transportation, Storage and Communications dependent variable

(Financial Intermediation, Real Estate, Business Services – Transportation, Storage, Communications)

Intercept -0.0135 0.0003 -0.0140 -0.0010 T-stat (-0.4750) (0.0120) (-0.4990) (-0.0410) P-value [0.6366] [0.9906] [0.6190] [0.9676] Press90 0.0007 0.0007 0.0008 0.0007 T-stat (2.7190) (2.7240) (2.9880) (2.9650) P-value [0.0085] [0.0083] [0.0040] [0.0042] log(GDP1990) -0.0039 -0.0065 -0.0029 -0.0053 T-stat (-0.7460) (-1.4360) (-0.5980) (-1.3970) P-value [0.4585] [0.1557] [0.5520] [0.1671] law and order -0.0035 -0.0032 T-stat (-0.8260) (-0.7890) P-value [0.4118] [0.4330] property rights 0.0031 0.0027 T-stat (0.5330) (0.4870) P-value [0.5957] [0.6278] Adj. R-sqr 0.0767 0.0841 0.0880 0.0949 Observations 66 68 67 69

Figure 1: Average Farm Mortgage Interest Rates across Three U.S. Regions around the Turn of 20th Century

4

5

6

7

8

9

10

11

12

1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1914 1930

The Great Plains

The South

New England

Data source: Davis (1965) Table 7.

%

Figure 2: Average Gross Returns for Reserve City Banks across Three U.S. Regions around the Turn of 20th Century

4

6

8

10

12

14

1888

1890

1892

1894

1896

1898

1900

1902

1904

1906

1908

1910

1912

1914

The Great Plains

The South

New England

Data source: Davis (1965) Table 3.

%

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Figure 3. Press Freedom and Adjusted Service Sector Value Added. Y axis is the log of adjusted 1995 Service Sector value added per capita in 1990 US Dollars, where the adjustment is made by removing the effect of the log of 1990 GDP per capita, the 1990 law and order rating, and property rights, based on the regression coefficients in Table 3: growth rate difference – (intercept + betalog(GDP1990)log(GDP1990) + betalaw1990law1990). The X axis is the 1990 press freedom ratings. A list of the labels is provided in the Appendix.

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Figure 4. Press Freedom and Adjusted Industrial Sector Value Added. Y axis is the log of adjusted of 1995 Industrial Sector value added per capita in 1990 US Dollars, where the adjustment is made by removing the effect of the log of 1990 GDP per capita, the 1990 law and order rating, and property rights and based on the coefficients in Table 3: growth rate difference – (intercept + betalog(GDP1990)log(GDP1990) + betalaw1990law1990). The X axis is the 1990 press freedom ratings. A list of the labels is provided in the Appendix.

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Figure 5: Press Freedom and Adjusted Growth Difference Between Service and Agriculture Sectors. Y axis is the adjusted growth-rate difference between Services and Agriculture sectors. The difference in geometric average growth rates between two sectors is adjusted by removing the effect of the log of 1990 GDP per capita, the 1990 law and order rating, and property rights and based on the coefficients in Table 5: growth rate difference – (intercept + betalog(GDP1990)log(GDP1990) + betalaw1990law1990). The X axis is the 1990 press freedom ratings. A list of the labels is provided in the Appendix.

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Figure 6. Press Freedom and Adjusted Growth Rate Difference Between Service and Industrial Sectors. Y axis is the adjusted growth rate difference between Services and Industrial. The difference in geometric average growth rates between two sectors is adjusted by removing the effect of the log of 1990 GDP per capita, the 1990 law and order rating, and property rights and based on the coefficients in Table 5: growth rate difference – (intercept + betalog(GDP1990)log(GDP1990) + betalaw1990law1990). The X axis is the 1990 press freedom ratings. A list of the labels is provided in the Appendix.

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Figure 7. Press Freedom and Adjusted Growth Rate Difference Between Financial Services and Agriculture. Y axis is the adjusted growth-rate difference between two industries: (i) Financial Intermediation, Real Estate, and Business Services And (ii) Agriculture, Hunting, Fishing and Forestry. The difference in geometric average growth-rate between two industries (by ISIC) is adjusted by removing the effect of the log of 1990 GDP per capita, the 1990 law and order rating, and property rights and based on the coefficients in Table 6: growth rate difference – (intercept + betalog(GDP1990)log(GDP1990) + betalaw1990law1990). The X axis is the 1990 press freedom ratings. A list of the labels is provided in the Appendix.

Financial Intermediation, Real Estate, and Business Services minus Agriculture, Hunting, Fishing, and Forestry

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Figure 8. Press Freedom and Adjusted Growth-Rate Difference Between Financial Services and Manufacturing. Y axis is the adjusted growth-rate difference between two industries: (i) Financial Intermediation, Real Estate, and Business Services And (ii) Manufacturing. The difference in geometric average growth rate between two industries (by ISIC) is adjusted by removing the effect of the log of 1990 GDP per capita, the 1990 law and order rating, and property rights and based on the coefficients in Table 6: growth rate difference – (intercept + betalog(GDP1990)log(GDP1990) + betalaw1990law1990). The X axis is the 1990 press freedom ratings. A list of the labels is provided in the Appendix.

Financial Intermediation, Real Estate, and Business Services minusManufacturing

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Appendix: Labels Used in the Graphs Label Country ALG Algeria ANG Angola ARG Argentina AUS Australia AST Austria BAN Bangladesh BEL Belgium BOL Bolivia BOT Botswana BRA Brazil BUL Bulgaria BLS Belarus CAM Cameroon CAN Canada SLA Sri Lanka CHL Chile CHI China COL Colombia CON Congo CSR Costa Rica CRO Croatia CZR Czech Republic DEN Denmark ECU Ecuador ELS El Salvador ETH Ethiopia EST Estonia FRA France GAB Gabon GHA Ghana GRE Greece GUA Guatemala HAI Haiti HON Honduras HK China, Hong Kong Special Administrative RegionHUN Hungary IDA India IND Indonesia IRN Iran (Islamic Republic of)

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IRQ Iraq IRE Ireland ISR Israel ITA Italy JAM Jamaica JAP Japan KAZ Kazakhstan JOR Jordan KEN Kenya ROK Korea, Republic of KUW Kuwait LEB Lebanon LAT Latvia LIB Liberia LAR Libyan Arab Jamahiriya LIT Lithuania MAD Madagascar MAL Malawi MLS Malaysia MLI Mali MEX Mexico MON Mongolia MOD Republic of Moldova MOR Morocco MOZ Mozambique OMN Oman NAM Namibia NED Netherlands NZ New Zealand NIC Nicaragua NIG Niger NGA Nigeria NOR Norway PAK Pakistan PAN Panama PNG Papua New Guinea PAR Paraguay PER Peru PHI Philippines POL Poland POR Portugal ROM Romania

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RSF Russian Federation SAU Saudi Arabia SIN Singapore VN Viet Nam SOL Slovenia SA South Africa ESP Spain SUD Sudan SWE Sweden CHE Switzerland SAR Syrian Arab Republic THA Thailand TOG Togo UAE United Arab Emirates TUN Tunisia TUR Turkey UGA Uganda UKR Ukraine EGY Egypt UK United Kingdom TAN United Republic of Tanzania USA United States BKF Burkina Faso URU Uruguay VEN Venezuela YEM Yemen ZAM Zambia

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