It is widely assumed that the rule of law is essential for economic growth. However, the rule of law is clearly a multidimensional concept, encompassing a variety of discrete components from security of person and property rights, to checks on government and control of corruption. This article reviews the theory underlying these different causal mechanisms linking the rule of law to economic growth, and provides an introduction to some outstanding measurement issues. It finds that the correlation among different components of the rule of law concept are not tight among developing countries and that some inferences about the effects of property rights protection may not be warranted.
The literature on the rule of law and economic growth has become one of the more dynamic areas of theoretical and empirical work in political science, economics, and law. More cross-national data exists now, purporting to measure the rule of law than we know what to do with. Yet even the very best work in the field has not been adequately attentive to the multidimensionality of the rule of law concept. What do we really mean by the rule of law? How are discrete components of the rule of law related to one another theoretically and empirically? To what extent are empirical findings based on one conception—and measure—of the rule of law robust to alternative specifications?
The empirical relationship between distinct components of the rule of law in a sample of 74 developing and transition economies indicates that measures of property rights, checks on government and corruption are correlated much less tightly than is often thought. A cluster analysis suggests that developing countries exhibit somewhat different rule of law “syndromes” or “complexes” and that the level of violence is one of the more important factors in differentiating among them in this regard. For some significant group of developing countries, establishing “law and order” in the most traditional sense remains an on-going challenge. The looser-than-expected correlation across rule-of-law measures raises the question of whether empirical findings in the literature are robust to alternative specifications. In the third and fourth sections, we undertake replications of influential work.
The study’s main findings are the following:
- In both the economics and political science literature, the dominant line of theoretical inquiry on the relationship between the rule of law and economic growth has centered on property rights and the institutions required to enforce them, such as checks on government and judicial independence. These models often explicitly or implicitly identify government predation as a principal constraint on economic growth. The policy conclusions are clear; restraining the government is crucial for economic performance.
- The ongoing role of violence has been highlighted as an even more fundamental constraint on the growth process. In many developing countries—the so-called failed states—it is the weakness of the government and the inability to provide law and order in the most basic sense that constitute the most profound barrier to growth. To think that the fine points of the law, judicial independence, or corruption constitute the fundamental barrier to economic growth in the face of the breakdown of order and widespread violence seems strange; rather, the failure of those institutions itself is almost certainly a result of state failure and the restoration of order thus the primary rule of law task.
- The review of the empirical literature suggests some further cautionary notes. First, the correlation among rule of law indicators for the advanced industrial states is much higher than among developing countries, suggesting the need for particular care in drawing inferences from global samples. Second, this article finds—as other studies have—that aggregate indices perform better than the discrete components of the rule of law that are highlighted in the theoretical literature. We cannot rule out the possibility that these findings are simply flawed because of fundamental methodological problems in the construction of such indices.
- However, one explanation is that indices and subjective measures may be capturing informal institutions or important differences between de jure and de facto rule of law. Another possibility is that indices are capturing complementarities among institutions—rule of law “complexes”—in a way that standard tests of discrete components of the rule of law typically do not. The cluster analysis suggests strongly the presence of different rule of law “complexes” or “syndromes” across developing countries. What distinguishes these complexes is not formal institutional arrangements, but corruption, risk of expropriation, and particularly the extent of violence. These findings suggest a research program that focuses more attention on the complementarities among rule of law institutions: how multiple dimensions of the rule of law complex operate to promote or retard economic growth.