Markets cannot excel without rule of law

A legal system characterised by insecure property rights, poorly enforced contracts and corruption cannot realise the true benefits of the free market because mutually beneficial trade can only safely transpire between persons or entities in close proximity to one another, says the Fraser Institute.

In contrast, developed nations with their sound legal systems allow for trade to be conducted across wide geographical distances among parties that do not know each other and probably will never meet.

In the Economic Freedom of the World index produced by the Fraser Institute, the legal structure of some 100 countries are rated on a scale of 1-10 based on the degree to which they protect property rights, have unbiased enforcement of contracts, and feature an independent judiciary. Researchers find:

The 24 countries that had a legal system rated at 7 or higher out of 10 had an average per capita GDP in 2000 of $25,716

These countries experienced an average annual real growth rate of 2.5 percent between 1980 and 2000.

Among the 21 countries that had a rating of less than 4 there was an average per capita GDP in 2000 of $3,094 and their growth rates averaged 0.33 percent over the two decades.

In short, the nations without the rule of law had approximately one-eighth the wealth and growth rates of the comparable levels for the countries with sound legal systems, says Fraser.

Source: James Gwartney and Jason Clemens, Can a Country Prosper without a Sound Legal Structure? Fraser Forum, July 2004, Fraser Institute.

For text http://www.fraserinstitute.ca/admin/books/chapterfiles/July04ffgwartney.pdf

For more on Economic Freedom and Growthhttp://www.ncpa.org/iss/int/

FMF Policy Bulletin/ 26 October 2004