Rule of law and economic development

In countries with strong rule of law:

1. Property rights over land, equipment, and personal items are clear and protected by law.
3. Contracts between people, businesses, and the government are effectively enforced by the legal system.
3. Political accountability is high and corruption is low.
4. Business regulations are clear and enforced in a transparent manner.

In such environments people make long-term investments and build large organizations. In contrast, if the property rights and contracts are not enforced and the business regulations are not clear, most of the economy consists of small family owned firms with little modern equipment. A high-tech, prosperous economy would not develop.

Notice the differences in the "Doing business rankings" on the chart. These rankings are published by the World Bank and indicate the quality of business regulations in a country. The higher the number, the worse the ranking.

Notice now the differences in incomes across these same countries.
Of course, when we look at a poor country with weak rule of law we don’t know if 1) it is poor because it has weak rule of law or 2) it has weak rule of law because it is poor. There is probably some truth in both statements. However, there is plenty of evidence that weak rule of law contributes to a weak economy. In other words, we know that statement 1 is true.

Recognizing the importance of the rule of law does not mean that we know how to improve it. Countries with weak legal systems and inefficient administration seem to be like that for decades, if not centuries. Although improvements are possible, they are painfully slow.


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