Economics of the Rule of Law

The Economist issue of March 15th 2008 includes an article on the relationship between economics and the rule of law. Among other things, the article addresses the issue of what the concept of the rule of law is really about and to what extent growth and development are directly related to it.

Despite ongoing debates, key actors in the “business” of development are increasingly including the rule of law under different forms and shapes in their agenda. Breaking down the concept of rule of law can be an interesting exercise.

Regulations: The World Bank’s Doing Business homepage states that: “Doing Business is a guide... for evaluating regulations that directly impact economic growth …” In simple terms, Doing Business collects data concerning regulations and procedures in countries all around the world. Using the gathered data, Doing Business produces a series of indicators which state the level of regulation in the respective country with regard to clearly identified topics. The topics chosen are directly linked to the ability of an entrepreneur to do business, which, in turn, is a direct reflection of the business environment, and, thus, economic development.

Enforcement: And it’s not all about rules. Enforcement matters. Public institutions are key players of policy-making and implementation, and the judiciary system is a key player in enforcement procedures, etc. With regard to the latter, the European Bank for Reconstruction and Development (EBRD) has its own projects dealing with the rule of law.

Last February, the World Bank Group and the EBRD organized a seminar which discussed the EBRD’s increasingly important legal reform agenda. The EBRD representatives explained their work and achievements in member countries and concluded that in the field of technical assistance, judicial reform has become a main priority. In fact, according to the EBRD, “while the ‘laws on the books’ in those countries have improved in quality and now show significant levels of compliance with international standards, the implementation of those laws remains fraught with uncertainties, deterring investors from participation in the countries’ markets out of fear that their legal rights will not be protected.”

The Economist’s conclusion is that there is not yet a clear definition of the rule of law from an economic point of view. The debate, however, cannot be a purely economic or legal one. It might be that defining a concept as complex as growth itself requires an interdisciplinary effort in economics and law.