Creating a Legal Framework for Economic Development

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 re-quired 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 upgrad-ing the nation’s judiciary. A virtuous cycle can arise in which initially modest expendi-tures 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. It used to be common in the economic literature on development to enumerate the multitudinous sources of market failure and prescribe complex government inter-ventions to cure them without paying much attention to the equally numerous sources, especially in poor countries, of governmental failure (Stiglitz 1994). A 1995 confer-ence on legal reform, as well as other recent judicial reform initiatives (Rowat, Malik, and Dakolias 1995; Dakolias 1996), attest to the growing awareness that the failure of governments in poor countries to provide the basic framework of a capitalist economy may be an important factor in keeping poor countries poor. Markets are more robust than some market-failure specialists believe. But their vigor may depend on the establishment of an environment in which legal rights, especially property and contractual rights, are enforced and protected—an environment that is taken for granted in wealthy nations (see Gray 1991 and Rausser 1992 for good statements of this essentially Weberian point). The citizens of wealthy countries take this legal machinery for granted because it works well enough most of the time and because it does not cost a great deal. In its ideal form (an important qualification), the machinery consists of competent, ethi-cal, and well-paid professional judges who administer rules that are well designed for the promotion of commercial activity. The judges are insulated from interference by the legislative and executive branches of government. They are advised by