I’ve just been reading a great paper* by Stephan Haggard at the University of California on the Rule of Law. It’s one of those papers that you read and say to yourself, “yes, that’s all pretty obvious”, and then realise that what he has made obvious is the opposite of received wisdom on the subject!
What he does is gather data across a large number of countries on various measures of the “Rule of Law”. There is a small industry producing such measures these days, since everyone realised that institutions and governance were critical for development.
Haggard takes some of the most common measures:
- Property rights (how much real control you have over your assets) and how well contracts are enforced (the traditional literature says that these are really important for long-run economic growth)
- Security of person (whether there is lots of violence and you are likely to get murdered)
- Measures on the checks and balances on government
- Measures of corruption
- And a couple of popular aggregate measures such as the Rule of Law indices from the World Bank and from the World Economic Forum.
Then what he shows is, to me at least, an eye opener. He finds that:
- These measures really aren’t that well correlated, i.e. they really are measuring different things.
- He replicates a famous study by Acemoglu, Johnson and Robinson (2001), which purports to show that property rights are crucial to long-run economic growth, and shows that, pretty much any of the above measures of the Rule of Law might have been driving that result. In other words, it might not be property rights at all, it might be less corruption, or better checks and balances on government or better security – you just can’t tell.
- When you look at how long-run economic growth is affected by all of these measures individually, the only one that matters is the aggregate Rule of Law index – and that is probably driven by corruption, not property rights.
* Stephan Haggard and Lydia Tiede, 'The Rule of Law and Economic Growth: Where are We?', World Development Vol. 39, No. 5, pp. 673-85, 2011