DOI: https://doi.org/10.18371/fcaptp.v1i32.200522

RULE OF LAW AND ECONOMIC GROWTH

V. O. Shevchuk, M. M. Blikhar, I. I. Komarnytska, N. M. Tataryn

Abstract


Using data from 41 countries for the 2013—2018 period, the dependence of GDP growth on the rule of law index that is calculated by the non-governmental organization World Justice Project has been estimated. Compared to other specialized indicators for assessing compliance with the rule of law, such as the World Governance Indicator, the International Country Risk Guide, or the Index of Judicial Independence, the WJP differs more fully into actual legal practice (not only the quality of legislation) by combining expert judgment with the results of questionnaires surveys of residents of the country. Cross‒regression estimates for the 2013—2018 averages are quite contradictory for the general sample of countries, but a direct dependence of economic growth on the rule of law has been obtained for the countries of Central and Eastern Europe and the former Soviet Union. IfUkrainerose from the current level of the WJP index (0.50) to the level ofGeorgia(0.61), it allows to increase the GDP growth rate by 0.6 percentage points. Estimates for panel data using the a random effects model (RE) confirm the direct relationship between the state of the rule of law and eco‒economic growth for CEE and the former Soviet Union, whereas a weak inverse relationship between the two indicators can be observed in Asia andLatin America. The results show that it is advisable to strengthen the rule of law in transformational economies, while this is not urgent measures in the other studied countries. The overall study does not deny the possibility of economic growth without advancing the legal foundations or deepening the process of democratization of political life, but this does not apply to the CEE countries and the formerSoviet Union. In the extended specification of the regression model, it seems that the favorable influence of the rule of law on GDP dynamics for transformational economies can be realized by slowing down inflation. At the same time, no dependence of inflation on the WJP has been found for Asian and Latin American countries; there is also no effect of consumer prices on economic growth. It is noticeable that estimates for the general sample of countries show the negative impact of only high inflation — over 15% per annum. Among other results, the direct relationship between investment and GDP growth is worth noting, regardless of the regression model chosen. This is in line with the standard assumptions of economic theory and, accordingly, reinforces the argument for the protection of property rights as a means of stimulating the investment process.


Keywords


rule of law; economic growth; panel data

Full Text:

PDF

References


Acemoglu, D., Johnson, S., Robinson, J. A., & Yared, P. (2005). From Education to Democracy? AEA Papers and Proceedings, Vol. 95, 2, 44—49.

Acemoglu, D., Johnson, S., & Robinson, J. A. (2005). Institutions as Fundamental Causes of Long-Run Growth. Handbook of Economic Growth, Vol. 1A, 385—472.

Barro, R. (2013). Democracy, Law and Order, and Economic Growth. Index of Economic Freedom. Washington: Heritage Foundation.

Bayar, Y. (2016). Public governance and economic growth in the transitional economies of the European Union. Transylvanian Review of Administrative Sciences, 48, 5—18.

Сarugati, F., Ober, J., & Weingast, B. (2019). Is development uniquely modern? Ancient Athens on the doorstep. Public Choice, 181, 29—47.

Сastro, R., Clementi, G. L., & MacDonald, G. (2009). Legal Institutions, Sectoral Heterogeneity, and Economic Development. Review of Economic Studies, Vol. 76, 2, 529—561.

Chang, H.-J. (2011). Institutions and economic development: theory, policy and history. Journal of Institutional Economics, Vol. 7, 4, 473—498.

Coase, R. H. (1960). The Problem of Social Cost. Journal of Law and Economics, Vol. 3, 1, 1—44.

Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2008). The law and economics of self‒dealing. Journal of Financial Economics, Vol. 88, 3, 430—465.

Dobler, С. (2011). The Impact of Formal and Informal Institutions on Economic Growth: A Case Study on the MENA Region. Hohenheimer volkswirtschaftliche Schriften, 65. Frankfurt: Peter Lang International Academic Publishers.

Elert, N., Henrekson, M., & Sanders, M. (2019). The Entrepreneurial Society. A Reform Strategy for the European Union. International Studies in Entrepreneurship, Vol. 98. Berlin: Springer-Verlag GmbH.

Feld, L., & Foigt, S. (2003). Economic growth and judicial independence: Cross country evidence using a new set of indicators. CESifo Working Paper, 906. Munich: CESifo.

Haggard, S., MacIntyre, A., & Tiede, L. (2008). The Rule of Law and Economic Development. The Annual Review of Political Science, Vol. 11, 205—-234.

Haggard, S., & Tiede, L. (2011). The Rule of Law and Economic Growth: Where are We? World Development, Vol. 39, 5, 673—685.

Kar, S., Roy, A., & Sen, K. (2019). The double trap: Institutions and economic development. Economic Modelling, Vol. 76 (C), 243—259.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1997). Legal determinants of external finance. Journal of Finance, Vol. 52, 3, 1131—1150.

La Porta, R., Lopez-de-Silanes, F., Pop-Eleches, C., & Shleifer, A. (2004). Judicial checks and balances. Journal of Political Economy, Vol. 112, 2, 445—470.

Lawson, T. (1987). The Relative / Absolute Nature of Knowledge and Economic Analysis. The Economic Journal, Vol. 97 (388), 951—970.

Maroof, Z., Hussain, S., Jawad, M., & Naz, M. (2019). Determinants of industrial development: a panel analysis of South Asian economies. Quality & Quantitym, Vol. 53, 3, 1391—1419.

Møller, J., & Skaaning, S.-E. Systematizing thin and thick conceptions of the Rule of Law. The Justice System Journal, Vol. 33, 2, 136—152.

Ozpolar, A., Guven, G., Ozsoy, F., & Bahar, A. (2016). Does Rule of Law Affect Economic Growth Positively? Research in World Economy, Vol. 7, 1, 107—117.

Pagano, M., & Volpin, P. F. (2005). The political economy of corporate governance. American Economic Review, Vol. 95, 1005—1030.

Stolper, A., Walker, M., Sabatini, C., & J. Marczak. (2007). Rule of Law, Economic Growth and Prosperity: Report of the Rule of Law Working Group. New York: Americas Society and Council of the Americas.

Stulz, R. M., & Williamson, R. (2003). Culture, openness, and finance. Journal of Financial Economics, Vol. 70, 3, 313—349.

Xu, G. (2011). The role of law in economic growth: A literature review. Journal of Economic Surveys, Vol. 25, 5, 883—871.

Versteeg, M., & Ginsburg, T. (2017). Measuring the Rule of Law: A Comparison of Indicators. Law & Social Inquiry, Vol. 42, 1, 100—137.

Voigt, S., Gutman, J., & Feld, L. (2015). Economic growth and judicial independence, a dozen years on: Cross-country evidence using an updated Set of indicators. European Journal of Political Economy, Vol. 38 (C), 197—211.

Williamson, O. E. (2000). The New Institutional Economics: Taking Stock, Looking Ahead. Journal of Economic Literature, Vol. 38, 3, 595—613.

Williamson, C. R., & Kerekes, C. B. (2011). Securing Private Property: The Relative Importance of Formal versus Informal Institutions. Journal of Law and Economics, Vol. 54, 3, 537—572.


GOST Style Citations


Acemoglu D. From Education to Democracy? / D. Acemoglu, S. Johnson, J. A. Robinson, P. Yared // AEA Papers and Proceedings. — 2005. — Vol. 95. — № 2. — P. 44—49.

Acemoglu D. Institutions as Fundamental Causes of Long-Run Growth / D. Acemoglu, S. Johnson, J. A. Robinson // Handbook of Economic Growth. — 2005. — Vol. 1A. — P. 385—472.

Barro R. Democracy, Law and Order, and Economic Growth / R. Barro // Index of Economic Freedom. — Washington : Heritage Foundation, 2013. — P. 41—58.

Bayar Y. Public governance and economic growth in the transitional economies of the European Union. / Y. Bayar // Transylvanian Review of Administrative Sciences. — 2016. № 48. — P. 5‒18.

Сarugati F. Is development uniquely modern? Ancient Athens on the doorstep / F. Сarugati, J. Ober, Weingast // Public Choice. — 2019. — № 181. — P. 29—47.

Сastro R. Legal Institutions, Sectoral Heterogeneity, and Economic Development / R. Сastro, G. L. Clementi, G. MacDonald // Review of Economic Studies. — 2009. — Vol. 76. — № 2. — P. 529—561.

Chang H.-J. Institutions and economic development: theory, policy and history / H.-J. Chang // Journal of Institutional Economics. — 2011. — Vol. 7. — № 4. — P. 473—498.

Coase R. H. The Problem of Social Cost / R. H. Coase // Journal of Law and Economics. — 1960. — Vol. 3. — № 1. — P. 1—44.

Djankov S. The law and economics of self‒dealing / S. Djankov, R. La Porta, F. Lopez-de-Silanes, A. Shleifer // Journal of Financial Economics. 2008. — Vol. 88. — № 3. — P. 430—465.

Dobler С. The Impact of Formal and Informal Institutions on Economic Growth: A Case Study on the MENA Region / С. Dobler // Hohenheimer volkswirtschaftliche Schriften. — № 65. — Frankfurt : Peter Lang International Academic Publishers, 2011. — 234 p.

Elert N. The Entrepreneurial Society. A Reform Strategy for the European Union / N. Elert, M. Henrekson, M. Sanders // International Studies in Entrepreneurship. — Berlin : Springer-Verlag GmbH, 2019. — Vol. 98. — 173 p.

Feld L. Economic growth and judicial independence: Cross country evidence using a new set of indicators / L. Feld, S. Foigt // CESifo Working Paper. — Munich : CESifo, 2003. — № 906. — 35 p.

Haggard S. The Rule of Law and Economic Development / S. Haggard, A. MacIntyre, L. Tiede // The Annual Review of Political Science. — 2008. — Vol. 11. P. 205—234.

Haggard S. The Rule of Law and Economic Growth: Where are We? / S. Haggard, L. Tiede // World Development. — 2011. — Vol. 39. — № 5. — P. 673—685.

Kar S. The double trap: Institutions and economic development / S. Kar, A. Roy, K. Sen // Economic Modelling. — 2019. — Vol. 76 (C). — P. 243—259.

La Porta R. Legal determinants of external finance / R. La Porta, F. Lopez-de-Silanes, A. Shleifer, R. Vishny // Journal of Finance. — 1997. — Vol. 52. — № 3. — P. 1131—1150.

La Porta R. Judicial checks and balances / R. La Porta, F. Lopez-de-Silanes, C. Pop-Eleches, A. Shleifer // Journal of Political Economy. — 2004. — Vol. 112. — № 2. — P. 445—470.

Lawson T. The Relative / Absolute Nature of Knowledge and Economic Analysis / T. Lawson // The Economic Journal. — 1987. — Vol. 97 (388). — P. 951—970.

Maroof Z. Determinants of industrial development: a panel analysis of South Asian economies / Z. Maroof, S. Hussain, M. Jawad, M. Naz // Quality & Quantity. — 2019. — Vol. 53. — № 3. — P. 1391—1419.

Møller J. Systematizing thin and thick conceptions of the Rule of Law / J. Møller, S.-E. Skaaning // The Justice System Journal. — Vol. 33. — № 2. — P. 136—152.

Ozpolar A. Does Rule of Law Affect Economic Growth Positively? / A. Ozpolar, G. Guven, F. Ozsoy, A. Bahar // Research in World Economy. — 2016. — Vol. 7. — № 1. — P. 107—117.

Pagano M. The political economy of corporate governance / M. Pagano, P. F. Volpin // American Economic Review. — 2005. — Vol. 95. — P. 1005—1030.

Stolper A. Rule of Law, Economic Growth and Prosperity: Report of the Rule of Law Working Group / A. Stolper, M. Walker, C. Sabatini, J. Marczak. — New York : Americas Society and Council of the Americas, 2007. — 114 p.

Stulz R. M. Culture, openness, and finance / R. M. Stulz, R. Williamson // Journal of Financial Economics. — 2003. — Vol. 70. — № 3. — P. 313—349.

Xu G. The role of law in economic growth: A literature review / G. Xu // Journal of Economic Surveys. — 2011. — Vol. 25. — № 5. — P. 883—871.

Versteeg M. Measuring the Rule of Law: A Comparison of Indicators / M. Versteeg, T. Ginsburg // Law & Social Inquiry. — 2017. — Vol. 42. — № 1. — P. 100—137.

Voigt S. Economic growth and judicial independence, a dozen years on: Cross-country evidence using an updated Set of indicators / S. Voigt, J. Gutman, L. Feld // European Journal of Political Economy. — 2015. — Vol. 38 (C). — P. 197—211.

Williamson O. E. The New Institutional Economics: Taking Stock, Looking Ahead / O. E. Williamson // Journal of Economic Literature. — 2000. — Vol. 38. — № 3. — P. 595—613.

Williamson C. R. Securing Private Property: The Relative Importance of Formal versus Informal Institutions / C. R. Williamson, C. B. Kerekes // Journal of Law and Economics. — 2011. — Vol. 54. — № 3. — P. 537—572.





Copyright (c) 2020 V. O. Shevchuk, M. M. Blikhar, I. I. Komarnytska, N. M. Tataryn

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

ISSN (print) 2306-4994, ISSN (on-line) 2310-8770