Rule of Law andEconomic Growth?
How Does the Rule of Law relate to Economic Growth?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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How Does the Rule of Law relate to Economic Growth?
Economic growth depends on many factors. Key among those factors is adherence to the rule of law and protection of property rights and contractual rights by a country’s government so that markets can work effectively and efficiently.
Laws must be clear, public, fair, enforced, and equally applicable to all members of society. Property rights, as you might recall from Environmental Protection and Negative Externalities are the rights of individuals and firms to own property and use it as they see fit.
Using this property includes the right to enter into contracts with other parties with your property. Individuals or firms must own the property to enter into a contract.
Contractual rights, then, are based on property rights and they allow individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of noncompliance. One example is the employment agreement:
The World Bank considers a country’s legal system effective if it upholds property rights and contractual rights. The World Bank has developed a ranking system for countries’ legal systems based on effective protection of property rights and rule-based governance.
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