John M. Olin Law & Economics Working Paper No. 287

The Judiciary and Economic Development

No degree of substantive law improvement—even world "best practice" substantive law—will bring the Rule of Law to a country without effective enforcement. A sound judiciary is key to enforcement. No doubt some technical laws can be enforced by administrative means, but a Rule of Law, in the primary economic sense of protecting property and enforcing contracts, requires a judiciary to resolve disputes between private parties. And protection against the state itself is made easier where the judiciary can resolve a controversy raised by a private party against the state based on constitutional provisions or parliamentary legislation. One conclusion widely agreed upon, not just in the economic literature but also among lawyers and legal scholars, is therefore that the judiciary is a vital factor in the Rule of Law and more broadly in economic development.

A number of studies show some of the positive benefits of strong effective judiciaries. The degree of judicial independence is correlated with economic growth.2 Better performing courts have been shown to lead to more developed credit markets. A stronger judiciary is associated with more rapid growth of small firms as well as with larger firms in the economy.3 Economic studies show that within individual countries the relative competence of provincial and state courts affects comparative economic competitiveness.