Dani Rodrik, the star development economist at Harvard’s John F. Kennedy School of Government, recently made a startling admission: He has been throwing around the latest big idea in economics—the rule of law—without a clear fix on what it means. The rule of law is the reigning motherhood-and-apple-pie issue of developmental economics, write the editors of The Economist. But although a national devotion to the rule of law seems to be an unalloyed blessing, it’s a concept that eludes a universal definition, and it doesn't necessarily produce strong economic results.
Back in the 1980s, the “Washington consensus” was in vogue: Get the policies right—budgets, trade, regulation—and prosperity will surely follow. But the Asian economic crisis of 1997–98 eroded economists’ confidence that they knew what the right policies actually were. It was also not clear whether macroeconomic tinkering made a smidgeon of difference if the rules of the game were a mess, The Economist says.
A new consensus quickly emerged. Adherence to the rule of law became the latest orthodoxy: National wealth will increase in countries that (a) establish political accountability, (b) improve the quality of the bureaucracy, and (c) follow the rule of law. Corruption should be battled. The judiciary should be reformed. Two economists even calculated a “300 percent dividend” that was supposed to accrue to a nation that significantly raised the quality of its “governance” in the long run. Sure enough, almost every rich country (with the “arguable exceptions” of Italy and Greece) scored well on the rule-of-law measures, and most poor countries did not.
Unfortunately, it wasn't obvious whether the rule of law preceded or followed economic growth. Moreover, The Economist points out, the rule of law has different definitions, which the writers call “thick” and “thin.” Some thick-minded economists believe that the rule of law is joined at the hip with liberty and democracy. True adherence to a rule of law constrains state power, and guarantees freedom of speech and association, they say. Thin-oriented economists take a narrower view, defining the rule of law as guaranteed property rights, predictable transaction costs, and the efficient administration of justice. But in either case, why have parts of Southeast Asia and Russia grown steadily richer under the sway not of the stately rule of law, but of crony capitalism and Kremlin banditry?
Although reforms in the rule of law, whether codified as a broad right to democratic institutions or simple access to a security of property, are linked to improved economic status, the tie is weak. Improving the rule of law is desirable, The Economist says, but not a prerequisite for growth.
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The Source: "Order in the Jungle" in The Economist, March 13, 2008.
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