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The Law-Growth Nexus

The Law-Growth Nexus: The Rule of Law and Economic Development

Kenneth W. Dam
Copyright Date: 2006
Pages: 323
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  • Book Info
    The Law-Growth Nexus
    Book Description:

    An increasingly popular view holds that institutions--in particular, the rule of law--are the keys to unlocking the developing world's full growth potential. But what exactly does this mean? Which legal institutions matter and why? How can policymakers use this knowledge to promote growth? InThe Law-Growth Nexus, Kenneth Dam brings five decades of experience as a legal scholar and policymaker to bear upon these questions. After reviewing the burgeoning literature on legal institutions and economic development, Dam unpacks the "rule of law" concept. Successive chapters analyze enforcement, contracts, and property rights -the three concepts that collectively define rule of law -and examine their roles in the real estate and financial sectors. Dam uses an extended analysis of China to assess the importance of the rule of law. This case study illustrates several of the book's central themes, including the difficulty of building a strong, independent judiciary and firstclass financial sector. The stark fact is that many parts of what we call the developing world have stopped developing, while other regions have seen a slowdown in once-promising growth. Could new or better legal institutions help jumpstart these economies? In exploring this question, The Law-Growth Nexus goes beyond regression results to examine the underlying mechanisms through which the law, the judiciary, and the legal profession influence the economy. The result is essential reading for analysts and policymakers facing the challenges of legal and economic reform.

    eISBN: 978-0-8157-1719-5
    Subjects: Political Science, Business, Law, Sociology

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-viii)
  3. Foreword
    (pp. ix-x)
    Strobe Talbott

    We often deal with hard data at Brookings. No statistic about today’s world is more important and less acceptable than this one: more than 1 billion people—a sixth of humanity—live on less than $1 per day. The persistence of global poverty is all the more daunting given how much effort has gone into promoting inclusive economic growth. In the years after World War II, policymakers tried to stimulate development through foreign aid. In the 1980s, they put their faith in liberalization and economic reform. But since the end of the 1990s, the persistence of global poverty has led...

  4. Acknowledgments
    (pp. xi-xii)
  5. Why This Book?
    (pp. 1-10)

    Emerson once laid it down as a rule that when friends meet after a time apart, they should greet each other by asking one question: Has anything become clear to you since we were last together? The sense of his rule applies to the subject of the book now in the hands of the reader.

    In the last decade the issue of how best to improve the rate of economic growth of the poorer nations of Africa, Asia, and Latin America has come to be approached along lines quite different from those in the decades after the Second World War....


    • [PART I. Introduction]
      (pp. 11-12)

      Four perspectives that I explore in this first part lay the basis for the detailed substantive chapters in the remaining parts.

      The first chapter concerns the concept of the rule of law itself. Whatever the value of that concept for lawyers and political scientists, policymakers and policy analysts will want to know its relevance for economic development policy. A further question is how the rule of law fits into the current focus on institutions.

      The second chapter explores the Law and Finance literature that has been so crucial in popularizing the notion that the origin of a country’s law is...

    • 1 Where Does the Rule of Law Fit in Economic Development?
      (pp. 13-25)

      What is this thing we call therule of law? Advocating the rule of law as a key to development is much too vague a prescription to be meaningful to policymakers in developing countries or to foreign assistance agencies in international organizations and individual developed countries. Before turning in later chapters to the meaning of the rule of law in particular economic sectors, it is important to have some sense of the concept’s history and general meaning.

      The concept has a long history. The rule of law was a preoccupation of writers in civilizations from Greece to early England and...

    • 2 Legal Institutions, Legal Origins, and Governance
      (pp. 26-55)

      Two legal families central to the discussion of the relationship between the rule of law and economic development are English common law and continental civil law—in particular, French civil law. An overview of these two families is warranted at the outset, if only to indicate what the concept of legal origins as a determinant of economic development entails.

      When William conquered England in 1066, he set in train a flow of events that eventually divided today’s Western world between common law and civil law countries. At that time the Roman law system that had distinguished the Roman empire no...

    • 3 Competing Explanations
      (pp. 56-69)

      Economist Dani Rodrik has trenchantly observed that econometric tests of the causes of growth are inherently suspect:

      Econometric results can be found to support any and all … categories of arguments. However, very little of this econometric work survives close scrutiny … or is able to sway the priors of anyone with strong convictions in other directions. Moreover, there is little reason to believe that the primary causal channels are invariant to time period, initial conditions, or other aspects of a country’s circumstances. There may not be universal rules about what makes countries grow.¹

      Rodrik’s observations suggest that factors other...

    • 4 Institutions and History
      (pp. 70-90)

      If one wants insight into how the developing world can attain the rule of law, one good place to start would be to ask how countries in today’s developed world did it. Although the developed world now stretches well beyond the countries of western Europe where the rule of law first arose, developed countries such as the United States, Canada, and Australia—and, in a less direct fashion, Japan—achieved a successful transplant of western European legal institutions. Perhaps the western European experience can provide insights into how this process of legal institutional development can succeed in developing countries where...


    • [PART II. Introduction]
      (pp. 91-92)

      Proponents of the rule of law in the context of economic development often express the core of their position, as noted in part I, by emphasizing the need to “enforce contracts and protect property rights.” This second part of the book takes up the three separate ideas underlying this simple phrase: enforcement, contracts, and property rights.

      The initial chapter in this part is about enforcement, specifically enforcement by an independent third party, which typically means enforcement through a court system, even though some tribal areas still retain the right to use communal enforcement systems. Even arbitration can work only if...

    • 5 Judiciary
      (pp. 93-122)

      A recurring theme in this book is that no degree of improvement in substantive law—even world “best practice” substantive law—will bring the rule of law to a country that does not have effective enforcement.¹ A sound judiciary is key to enforcement. No doubt some technical laws can be enforced by administrative means, but a rule of law, in the primary economic sense of protecting property and enforcing contracts, requires a judiciary to resolve disputes between private parties. And protection against the state itself is made easier where the judiciary can resolve a controversy raised by a private party...

    • 6 Contracts and Property
      (pp. 123-133)

      Commercial bargains are usually carried out without the need for court enforcement. But even though businessmen prefer to work out between themselves any problems with the performance of their contracts, their bargaining about performance takes place in the shadow of the law.¹ The prospect that courts will resolve these disputes impartially if the contracting parties cannot agree often leads to more reasonable bargaining positions and more prompt compromise. Indeed, where the courts are not available for whatever reason, one finds mafia-type enforcement raising its ugly head.²

      From the standpoint of economic development, perhaps the most unfortunate consequence of the unreliability...

    • 7 Land
      (pp. 134-158)

      Real estate is a major source of value in both developed and developing countries. In the United States households have $9.6 trillion, or 16 percent of their wealth, in real estate.¹ Farmers have another $1.3 trillion of equity in their farms, bringing total household wealth in real estate to nearly 20 percent of household assets.² Hernando de Soto, writing in 1993, said that some 70 percent of Peruvian wealth was in real estate.³ One study found that in Uganda “between 50 and 60 percent of the asset endowment of the poorest households” was land.⁴ The World Bank confirms that the...


    • [PART III: Introduction]
      (pp. 159-162)

      Any study of the role of law and legal institutions in economic development must pay particular attention to the financial sector. The reasons are many.

      The importance of the financial sector is well established. The link between financial development and growth of per capita gross domestic product has been the subject of extensive studies, which have established that banking and stock market development are good predictors of economic growth.¹ Some studies directly address the issue of whether financial development actually causes growth and conclude that it does, despite the fact that causation is always a difficult question in cross-country econometric...

    • 8 Equity Markets and the Corporation
      (pp. 163-189)

      Modern economies are heavily dependent on the corporate form of doing business. The sheer scale of modern commercial activity, once it goes beyond the individual store and workshop, increasingly demands capital beyond the resources of most individual entrepreneurs. Although the capital needs could in some cases be met by partnership, the partnership form has proved rather inflexible and is used primarily by very small enterprises and by the professions.¹ The use of companies to pool large sums of capital and therefore to raise capital for large new commercial ventures has been increasingly common since the Dutch and English East India...

    • 9 Credit Markets, Banks, and Bankruptcy
      (pp. 190-220)

      Credit markets are just as important as equity markets to financial development. In most countries far more finance is generated in credit markets than in public equity markets. This is true even in the United States, which is usually thought to be the country with the most pronounced equity culture.¹

      In equity markets, the legal issues revolve around questions of corporate law and securities regulation. In debt markets, the bank—the central institution for large-scale lending—is the point of departure. Some countries, especially the more developed ones, do have corporate debt markets, but even the countries of Southeast Asia...


    • 10 The Implications of a Rule-of-Law Approach to Economic Development
      (pp. 223-232)

      The importance of institutions to economic development is well established. By the end of the 1990s, the theory that institutions were the most important determinant of the pace of economic development in any given country became a dominant view in much of academia and in the research departments of various international financial institutions. Other views remain important. One competing view emphasizes the role of geographical factors in explaining differing rates of economic growth. Another school of thought emphasizes social factors (social norms, culture, religion) in a country’s population. Still another advocates increased emphasis on particular kinds of developing country programs,...

    • 11 China as a Test Case
      (pp. 233-278)

      China is the fastest-growing country in the world. Moreover, its economy has already become one of the most important. Some commentators predict that China’s economy will surpass the size of the U.S. economy some time in the second decade of this century (albeit at a much lower per capita income level). For most purposes, these predictions are quite misleading.¹ Yet China’s prowess in manufacturing is already a challenge to the manufacturing sectors of the most advanced economies, at least in labor-intensive industries. Moreover, China is going beyond low-wage manufacturing and entering the high-technology arena (from the top down, so to...

  10. References
    (pp. 279-312)
  11. Index
    (pp. 313-324)
  12. Back Matter
    (pp. 325-326)