Why is the legal and judicial system not relevant for some citizens and in some countries? How can judicial systems be made to play a role in economic development? What does institutional reform, and the judicial system reform in particular, teach us about the design of systems in various countries? This paper from the World Bank presents conclusions regarding institutional development and suggests that the formal legal system can play a critical role in supporting the development of private business.
All societies need institutions to settle disputes and mechanisms to enforce property rights and contracts. Without these mechanisms commercial transactions are limited to the simplistic and high risk transactions, which constrain many productive investments. The systems that nations develop take myriad forms, ranging from family- and community-based networks to formal state-sponsored judicial systems enforcing complex laws. Well functioning, state-sponsored justice provides a complement to other, more informal, systems. Together these systems, when they work well, keep the costs of enforcement low for both small and large participants in markets and for small and large transactions.
Governments in many countries around the world are designing reforms in their judicial systems or thinking about how to build consensus or coalitions for reforms. In doing so, it is necessary to think not only about the final goal but also the capacity of countries to implement certain reforms and the possible need for a graduated approach.
- New institutions need to complement existing conditions in a country—that is, they need to be consistent with the country’s income level, skills and education levels, available technology, the distribution of income, geography, and other institutions
- Courts are only relevant to the extent that they approach dispute resolution in a manner that is understood by the people they serve and that meet their needs
- Study of different systems is important because it gives us ideas and enhances the realm of the possible
- Some degree of competition provides incentives for improving institutional design. The desire to do better than a peer group is often a healthy driver of change in private business—so can it be in the public domain for both individuals and organisations
- Economic openness can go a long way towards facilitating institutional reform by creating demand for change
- How institutions function depends very much on the incentives provided to the relevant agents.
To carry out reform more effectively, there needs to be a deeper and more concrete understanding of how institutions work in other countries, how the various pieces fit together:
- Reforms in the judiciary, just like reforms in any other field can be greatly enhanced if key players are open to innovation and to new approaches
- Ideas can be stimulated and consensus for reform brought about through greater openness – both with the rest of the world and within each society
- Reform in small steps is also reform and it is important to advance in small ways even if a “comprehensive” reform is not possible.
