Creating a Legal Framework for Economic Development

Abstract

A modernizing nation's economic prosperity requires at least a modest legal infrastructure centered on the protection of property and contract rights. The essential legal reform required to create that infrastructure may be the adoption of a system of relatively precise legal rules, as distinct from more open-ended standards or a heavy investment in upgrading the nation's judiciary. A virtuous cycle can arise in which initially modest expenditures on law reform increase the rate of economic growth, in turn generating resources that will enable more ambitious legal reforms to be undertaken in the future. Legal reform is an important part of the modernization process of poor countries, but the focus of such reform should be on creating substantive and procedurally efficient rules of contract and property rather than on creating a first-class judiciary or an extensive system of civil liberties. This is a general prescription, however, and the proper legal structure for an individual country will depend on a host of considerations. The fundamental tradeoff is between making a rather modest investment in better rules and making a big investment in the judiciary. The more costly it is to create a high-quality independent judiciary, the more beneficial it is to focus legal reform on the adoption of substantively and procedurally efficient rules. Indeed, if the law's administrative infrastructure is sufficiently weak, even good rules may simply be ignored. Economic progress is possible with little—perhaps with no—law and can be stifled by excessive investment in public-sector projects, including legal reform. A small expenditure on law reform can increase the rate of economic growth, which will in turn generate additional resources for more ambitious legal reforms later.