Self-Interest and the Rule of Law

According to the Economist, in the last decade the rule of law has become "the motherhood and apple pie of development economics". As a political idea the Rule of Law is widely accepted, but as an economic concept it replaced the crumbling "Washington Consensus" after the 1997-8 Asian Crisis. Since then the emphasis shifted from policies to institutions. In other words, the trick is not the strategy but the rules of the game.

The stakes are huge. The World Bank considers it the 300% dividend – in the long run, a country's income per head rises by roughly 300% if it improves its governance by one standard deviation. It is the different between Spain and South Africa, or Chile and India. However, it is not been proven that the Rule of Law is a precondition to growth.

The problem is in the definition - does the rule of law "defends human rights or guarantees property rights?" Moreover, does growth helps the rule of law, or is it the other way around. And the real puzzle is to explain the success of crony capitalism in Asia or Russia. As the Economist notes "... the more economists find out about the rule of law, the more desirable it seems – and the more problematic as a universal economic guide."

It seems to me the problem is not in the definition of the Rule of Law but of Economics. Money is a consistent and transparent way to establish relationship among individuals and societies. People are motivated by self-interest and economics frames the incentives.

Two things work to the advantage of crony capitalism. First, if the country has natural resources than the economic output doesn't require much input and therefore it is easier for the insiders to take more than their fair share. There is simply enough wealth to spill over and pacify the poor. A push for talent is not a necessity. Second, if the country has a history of bowing to authority, than the culture impedes not only the push for democracy but also the fight against corruption. In a sense, the poor accepts that the rich have the right to be rich because they have always been in a position of authority.

Therefore, if economics is a system of incentives and there are no strong motivations to fight the political apparatus than the Rule of Law as defined by the Insiders will bring economic growth. And it will last until something changes, either in the commodities markets or in the political will.