The Rule of Law and Economic Growth

Economic growth and subjects related to economics is considerably related and affected
by rule of law. It is important to notice that efforts of advancing the rule of law is not just for security
and political practices, it is as well as economical. Relation between rule of law and economics can be
represented as mutually coordination between two practices. We can analyse this relation in four
subtopics.
Firstly, the effects of property rights on investment and the effects of contract
enforcement on trade build up the core of the relationship between law and economics. As Haggard et
al (2008) stated that The more well-developed and secure are property rights, the greater incentives
individuals have to invest. Secure property rights and the capacity to contract over time and space also
permit trade and a corresponding increase in the efficiency of resource allocation, including through
the development of the financial system. The importance of rule of law in economics is seen at time
inconsistency problems. The individuals can protect their own property with their precautionary acts,
but if there is no regulations on the contract that can be broken in some ways, the uncertainty can
affect investment and trade. Moreover, the protection of property rights is the main important
procedure to affect growth of the economy. It creates safety in the market for both individuals and
entrepreneurs. The trust of protection of property rights had an impact on growth, investment,
financial development and trade. Looking the relation between rule of law and economics from
different viewpoint, absence of rule of law can lead to lack of property or contractual rights. The
difference between developed and poorer countries power of legal systems, we can see that the
importance of regulated property rights especially in developed ones. Without rule of law, borrowing
to invest and creation of job opportunities can be interrupted (McMahon & Karabegovic, 2006) .
Secondly, corruption of the rule of law has an effect on economic growth of a
country. In both micro and macro sense, equal treatment and procedural fairness can alter peoples
decision. Therefore, individuals do not trust the equal treatment by the judicial system. Haggard et
al(2008) said that If individual can not be confident of equal treatment by the judicial system, then
the courts cease to be a dependable institution for dispute resolution, parties are forced back on the
costly alternative of private enforcement, and investment and trade suffer accordingly. There might
be people in the system who had tried to increase their rent. If the legal system can not restrain this
situation, then the rent-seeking behaviours can lead to an increase in the cost of production. The both
effects of rent-seeking behaviours and the unreliability of the equal treatment could obstruct the long-
run growth of a country. Monopolies, restrictions to entry, protectionism, misallocation of government
spending, and private expropriation of assets through managerial malfeasance are the most effective
barriers to long-run growth.
Thirdly, checks and balances on state power can be effective on economic decisions.
Using their power for its own benefit, sovereigns act would be harmful for the economic growth.
When sovereigns choose the way of protecting their citizens right or violate their rights, they faced
with somehow economical constraint. If sovereign uses property rights for purpose of benefiting them,
return of investment and investment attempt will be less turn. Regime type can also change the
economic situation of a country, but this subject was inconclusive. In one hand, controlling for income
and other variable could have no effect on economic growth no matter what type of the regime that the
country has. On the other, with slower growth performance wealthy democracies can differentiate
from dictatorship by their higher aggregate productivity growth.
Lastly, political constraints can barrier to economic development. Independence of
judiciary is an important thing in law to eliminate the barriers on economic development. As Feld &
Voigt (2003) stated that An independent judiciary could thus also be interpreted as a device to turn
promises-e.g. to respect property rights and abstain from expropriation-into credible commitments. If
it functions like this, citizens will develop a longer time horizon which will lead to more investment in
physical capital but also to a higher degree of specialization, i.e., to a different structure of human
capital. That means, there will be a causative relationship between economic growth and judicial
independency. The other important thing in the legal system affected economic growth is legal origins.
Common and civil law have differently effect on economy of the state. According to Haggard et
al.(2008) civil law system are less hospitable to private economic activity than are common law
systems, with French legal tradition having particularly deleterious effects compared with the German
or Scandinavian civil law models. Among developing countries, some stages of development is
related with the nature of law. Equity of markets, corporate governance and the financial sector is
important for growth.
All in all, we might conclude that he institutions, legal system of a country, regime
type, corruption and, most importantly, protection of property rights are the things that make the rule
of law and economics come together. Consequently, the rule of law can contribute and affect the
economic growth of a country.

Bibliography
Haggard, Haggard, S., MacIntyre, A., & Tiede, L. (2008). The Rule of Law and Economic Development.
Annual Review of Political Science, 205-222.
McMahon, F., & Karabegovic, A. (2006). Rule of Law Critical to Economic Success. Fraser Forum, 5-7.
Feld, L. P., & Voigt , S. (2003). Economic growth and judicial independence: Cross country evidence
using a new set of indicators. CESifo Working Paper,906, doi: http://hdl.handle.net/10419/76285