Economic Development, Law And

The modernization of economic life entails increasingly complicated interactions among individuals and organizations at national and international levels. Furthermore, the mix of deregulation and the privatization of state enterprises undertaken in many developing countries, coupled with an intensified international trade of complex goods and services, has increased the need for legal frameworks with clear rules for economic interaction. For example, the increased permeability of national frontiers to international trade and ideas is of such magnitude that it has forced national authorities to consider the adoption of best international practices for protecting intellectual property rights.

This suggests a greater impact of laws on economic interactions and vice versa. Therefore, officials need to design, interpret, and enforce legal rules in a consistent, coherent, and predictable manner to enhance risk management and thus foster wealth generation in a growing complex international economy.

Strengthening the rule of law, with the aim of generating economic prosperity, requires securing property rights and making the exercise of the state's power more coherent, predictable, and consistent with incentives to foster investment and economic development. To comply with these requirements, such a “rule of law state” would have a government itself subject to laws while every person (regardless of socioeconomic status, ethnicity, or gender) would be treated with equal rights within a judicial system reasonably accessible to all. The rule of law requires effective criminal and civil courts. In addition, economic development requires the state clearly to define and make public legal rules, with those rules interpreted and enforced by a judicial system immune from systemic abuses of discretion or corruption.

High costs for delineating and protecting property and contractual rights are still common in most developing countries. Many of these countries still present a picture of unpredictable regulatory frameworks and multiple, high, and unanticipated taxation applied to the same bundle of property rights. Pernicious effects are sometimes compounded by an inconsistent application of the laws, worsened by judicial ineffectiveness and corrupt practices. As a result, transaction costs (reflecting the costs of acquiring information, negotiating complex transactions, and monitoring contractual compliance) increase to levels that make investments unprofitable for those demanding and supplying goods and services within a market.

Within this context, a centralized and discretionary “top-down” approach to lawmaking in developing countries has resulted in a general rejection (or in the best case scenario, irrelevance) of the formal legal system. In these cases, one frequently finds the poorest segments of the population perceiving themselves as “divorced” from the formal framework of public institutions. This institutional divorce reflects a gap between the “formal law in the books” and the “law in [Page 449]action,” frequently found in Africa, Asia, and Latin America. Because of this gap, large segments of the population, who lack the information or resources to surmount significant substantive and procedural barriers to access the court systems, pursue informal means to redress their grievances.

Edgardo Buscaglia and Paul Stephan have empirically verified this relationship between barriers to justice and the growth of alternative dispute resolution in a study covering seventeen developing countries. In practice, informal institutions provide an escape valve for certain types of conflicts. Yet many other types of disputes, involving fundamental rights and the public interest, go unresolved. This state of affairs undermines the legitimacy of the state, hampers economic interactions, and disproportionately burdens the poorest segments of the population.

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