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LexisNexis and the World Justice Project

8/19/2008 11:08:48 AM EST

Rule of Law: A Nation's Intangible Capital

Why the Rule of Law is Important for Economic Development

Posted by Rule of Law Resource Center Staff

In May of this year US Ambassador to Cambodia, Ambassador Mussomeli was asked “What is the single most pressing issue in Cambodia today preventing development?" His response was quite compelling:

“I can sum up the answer in three words: rule of law. This is a broad issue that includes challenges in Cambodia such as corruption, lack of transparency, and strengthening governmental institutions like the judiciary. Weak rule of law impedes everything that we are working to accomplish in Cambodia. On the economic development side, investors are leery of opening a business if they have to pay large bribes to government officials or if they can't rely on the courts to impartially enforce contracts. Corruption siphons away funds that should be going to support education, building infrastructure and providing health care. And weak governmental institutions have a negative impact on human rights by allowing practices like human trafficking and press intimidation to continue.”

From the minimalist’s perspective… we can draw a direct link between Rule of Law and economic development. In fact… employing Rule of Law as the road to success and prosperity is better than selecting democracy as the route to the same destinations.

I often use the Asia Region to illustrate the link between Rule of Law and economic development.

Unlike Africa… the Middle East… and most places in Latin America… many Asian countries have transitioned to societies where judiciaries and Rule of Law are strong. Strong judiciaries are key drivers of prosperity in places such as Taiwan… South Korea… Singapore and Hong Kong.

In Singapore… South Korea and Taiwan… governments successfully promote economic development. Hong Kong is perhaps one of the freest free market economies in world.

These countries have one thing in common. Each has a strong judiciary that values Rule of Law.

A recent World Bank study assessed the relative contributions of various kinds of capital to economic development. The study looked at natural capital such as nonrenewable resources… crop and pasture land… forests and protected areas. The study also looked at produced capital such as machinery… equipment and structures. Finally, the study looked at “intangible” capital such as the trust a nation’s people has in its judicial system… property rights and government. When all was said and done World Bank economists determined “intangible” capital accounted for 80 percent of the wealth in rich countries and 60-percent of the wealth in poor countries. They concluded… “Rich countries are largely rich because of the skills of their people and the quality of the institutions supporting economic activity.”

This study is relevant to us because economists further determined Rule of Law made up 57 percent of countries’ intangible capital. Education accounted for another 36 percent of intangible capital.

I look forward to your comments