Okezie Chukwumerije, Rhetoric Versus Reality: the Link Between the Rule of Law and Economic Development

• Citation: Vol. 23 No. 2
• Publication year: 2009

RHETORIC VERSUS REALITY: THE LINK BETWEEN THE RULE OF LAW AND ECONOMIC DEVELOPMENT

Okezie Chukwumerije^*

INTRODUCTION

The last two decades have seen a revival of interest in the rule of law and its relationship with economic development.¹This revival is part of an ongoing effort to find solutions to the economic difficulties facing developing countries.²Cultural, geographical, and institutional factors are among the various reasons offered as explanations for the slow economic growth of some developing countries.³In recent years, institutional factors have become the prevailing explanation for the poor performance of developing countries.⁴The absence of basic institutions that support vibrant market economies is now seen as a major reason why developing countries remain poor.⁵The vitality of markets-a central element for stimulating economic growth in developing countries and lifting them from poverty-depends on "the establishment of an environment in which legal rights, especially property and contractual rights, are enforced and protected."⁶Often taken for granted in developed countries, the institutional frameworks necessary to support market economies, especially legal institutions, are usually either lacking or ineffective in developing countries.⁷Therefore, establishing effective institutions is considered an important element of the strategy for promoting economic development in these countries.⁸As a consequence, the issue of economic growth in these countries has been "reconceived largely as a question of governance."⁹This has prompted a heightened emphasis on how reforms, especially legal reforms, in these countries can be used to propel their development.¹⁰

Much of the effort in promoting legal reforms in developing countries has concentrated on implementing rule of law initiatives.¹¹Studies that appear to show a link between the rule of law and economic development motivate the drive to institutionalize the rule of law in developing countries.¹²Although this professed link remains contested, international aid organizations and foreign governments continue to push the rule of law agenda, often offering as justification not only the inherent benefits of the rule of law in creating a limited government but, principally, its ability to foster economic development.¹³

The World Bank and the International Monetary Fund ("IMF") have been at the forefront of the latest efforts to implement institutional law reforms in developing countries.¹⁴Even though these international organizations often do not directly subsidize rule of law initiatives, they promote these initiatives by encouraging member states to adopt best practices anchored by the rule of law and by sometimes conditioning financial assistance to developing countries on their adoption of institutional reforms aimed at enshrining and extending the rule of law.¹⁵Governmental agencies (such as the aid and development agencies of the European Union and the United States) and non-governmental agencies (such as private foundations) have also played active roles in promoting rule of law initiatives.¹⁶It has been estimated that from the 1980s to the 1990s, organizations such as the World Bank and the U.S. Agency for International Development ("USAID") spent more than $1 billion on rule of law initiatives.¹⁷

Economists have also played a crucial role in the revival of rule of law initiatives as tools for promoting economic growth.¹⁸There has been a proliferation of economic studies on the relationship between the state of legal institutions and economic growth, both in developed and developing countries.¹⁹Remarking on recent economic studies on the role of law in development, The Economist noted that "in the past ten years the rule of law has become important in economics"; in particular, it "has become the motherhood and apple pie of development economics."²⁰The Economist further noted that the "rule of law is held to be not only good in itself, because it embodies and encourages a just society, but also a cause of other good things, notably growth."²¹These economic studies have been useful in drawing attention to the relevance of institutional reforms, including legal reforms, to economic development. However, some of the studies have not always demonstrated an appreciation of proper usage of basic legal concepts such as "law," "rights," and "property rights."²²Law and economics scholars, who have also been active in exploring the linkage between institutions and development, have been more careful in their usage of these concepts.²³

This latest interest in the role of legal institutions in economic development, sometimes called the second wave of the law and development movement,²⁴has resulted in developing countries expending significant resources to reform their legal institutions.²⁵These resources have been spent on institutional reforms, such as enshrining the rule of law, reforming judiciaries, modernizing administration of justice, and strengthening the enforcement of legal norms.²⁶Whether these law reform initiatives are a result of local impetuses for change or a product of the pressure exerted on these countries by external agencies and foreign governments, the increased emphasis on rule of law initiatives raises the important question of whether this use of scarce resources is warranted considering the effects of rule of law reforms. This appraisal is especially necessary in view of the range of pressing economic and social problems confronting these countries. For example, money spent on rule of law initiatives is money that could have been spent on the direct alleviation of poverty or on the health care needs of the poor.²⁷To be worthwhile, the expenditures on rule of law initiatives must be justified by the measurable benefits that accrue to the countries that adopt them. Against the background of the limited resources of developing countries and the severity and immediacy of their economic and social problems, the opportunity cost of the resources they spend on promoting rule of law initiatives is put in sharp relief.²⁸

The suggestion here is not that the rule of law should be viewed primarily from an instrumental perspective. After all, it was not for the promotion of economic growth that the concept of the rule of law was initially conceived. Classical rule of law theorists were not concerned primarily with economic development, but with the creation of limited governments in which individual liberties and freedoms could flourish.²⁹Historically, the creation of a state of liberties and freedoms, not the promotion of economic growth, was the foremost concern of rule of law theories.³⁰In a liberal state, the rule of law is an end in itself, for only in a state of limited powers can the liberties and freedoms of individuals be free from unrestrained attacks, both from the government and from other citizens.³¹

The rule of law therefore has important moral goals other than the promotion of economic development. These goals are of inherent value and are, in themselves, independent justifications for the entrenchment of the rule of law. However, when rule of law initiatives are advocated and implemented on the ostensible basis of their connection to the stimulation of economic development, it is useful to explore the validity of this professed link and to assess whether the benefits of these initiatives outweigh their opportunity costs, measured in terms of forgone investments in other areas of social need.

Kevin E. Davis and Michael J. Trebilcock have noted that advocates of legal reform as an engine for economic development manifest three levels of optimism: (1) optimism about the causal link between targeted legal reform and economic development; (2) optimism about the possibility of effective legal reform; and (3) optimism about the ability to identify the types of legal reforms that more directly stimulate economic development.³²Knowing whether this optimistic outlook is warranted by the practical experience of those countries that have implemented rule of law reforms is vital to determining if the substantial investments in rule of law reforms would yield the professed dividend of economic development in the struggling parts of the world.

The primary objective of this Article is to determine whether there is any validity to the professed link between the rule of law and economic development. This discussion is put in its proper historical context by an examination of the origin and evolution of law and development theories. The paper then analyzes the competing definitions of the rule of law. Understanding the proper usage of the doctrine is vital in this study because the economic implications of the doctrine depend, in part, on which conception of the doctrine is preferred. The paper then evaluates the arguments for and against a connection between the rule of law and economic development. It also considers the effect of the new institutional economics ("NIE") theory on our understanding of the factors that contribute to economic progress. Finally, drawing on the insight of the NIE theory, it canvasses the limits of formal legal institutions in influencing economic growth.

The basic view that animates this Article is that while the rule of law may be helpful in building the basic framework to support a market economy, legal reforms alone are inadequate to address the problem of economic growth in developing countries. It is only when coupled with other institutional reforms-formal and informal-that that the rule of law can have discernible benefits on economic prosperity. The paper suggests that, rather than being viewed primarily as an engine for stimulating economic development in developing countries, rule of law reform should be approached as part of a broader strategy for stimulating economic growth in the large part of the world that has been struggling with the problem of economic deprivation.

I. THE ORIGINS OF THE LAW AND...