No Growth Without Justice – Measuring the Rule of Law in Asia

“Privatization is meaningless if you don’t have the rule of law”, was once argued by Milton Friedman. But what amounts to the rule of law?

The idea of measuring the rule of law may seem like a bizarre suggestion, but when you consider that the rule of law is a prerequisite for economic growth, economic freedom and a more equal distribution of resources across an economy, it becomes clear that this is a most important task indeed.

This point was highlighted by Dr. Michael Walker, Senior Fellow of the Canadian Fraser Institute, at the recent 7th Conference of the Economic Freedom Network Asia on Securing Economic Growth: Legal Structures and Property Rights in Asia. The conference was held at the Sheraton Grande Laguna Resort in Phuket, Thailand, on October 1st and 2nd, 2005.

In his presentation, Dr Walker presented statistical evidence from various sources, to draw parallels between economic growth and various other indicators, coming to the remarkable conclusion that the closest statistical correlation for economic growth with other indicators is with the Rule of Law (as measured in the Fraser Institute’s Economic Freedom of the World <www.freetheworld.com> report).

This was quite a remarkable statement to come from a man, who for the past 20 years, has been the driving force behind the Economic Freedom of the World Report (EFW), an index which rates and ranks the degree of economic freedom in 127 countries. Indeed, he conceded that the mantra of ‘privatise, privatise, privatise” by itself can lead to adverse results, as has been the experience of Russia, because, as Nobel laureate Milton Friedman, one of the other co-founders of the EFW index pointed out in the introduction for the 2002 issue of the report, “Privatization is meaningless if you don’t have the rule of law. What does it mean to privatize if you do not have security of property, if you can’t use your property as you want to?”

Of course, more Rule of Law does not necessarily lead to more economic freedom or growth. It is a necessary precondition, but whether it actually results in economic growth is dependent on the quality of the legal system and on the impact of legislation on other variables of economic freedom, but unfortunately this is extremely difficult to measure objectively.

At present there is no specific Rule of Law index which economists and policy advisers may resort to for comparing the extent of the Rule of Law across countries. Despite the fact that there has long been awareness that sound legal structures are required to guarantee a free and prosperous market economy, there has been little systematic research into the relationship between law and economic development. Legal scholars tend to have little interest in economics, if they do it tends to be in very specific areas (such as business regulation), with little concern to macro-economic growth. Whereas economists have a tendency to make assumptions, especially for matters that are not of their immediate concern, and in most economic studies, there is no analysis of legal structures, as these are assumed to function in an ideal way.
It therefore should come as no surprise that the Economic Freedom of the World report also did not have a section on the Rule of Law when it was first published. As Professor Robert Lawson, one of the authors of the report, explained the lack of such an indicator resulted in several inconsistencies in the index, such as an extra-ordinarily high rank for Guatemala, which is a case of economic anarchy rather than economic freedom.

It was only in 2002 that the “Legal Structures and Property Rights” component was integrated into the index. Since then the Economic Freedom of the World report uses 5 subcomponents, to define the part of the index on “Legal Structures and Property Rights”. The data for these subcomponents chiefly relies on 2 sources:

• The Global Competitiveness Report of the World Economic Forum (WEF) in Geneva, Switzerland, which is used to define “Judicial Independence”, “Impartial Courts” and the “Protection of Intellectual Property” .
• The International Country Risk Guide, published by the Political Risks Services (PRS) consultancy in Syracuse, USA, for the data for “Military Interference in Rule of Law and Political Process” and the “Integrity of the Legal System”.

In view of this, representatives from both institutions were asked to make presentations on the “Composition, Methodology and Statistical Basis” of their respective reports. The speeches of Dr. Christopher McKee of PRS and Dr. Irene Mia of the World Economic Forum, were most enlightening, but also revealed some concerns regarding the objective comparability of the data. Unlike the rest of the index, the data for these components is based on survey questionnaires, which is a very useful methodology for assessing the state of affairs within a particular country, but when applied to international comparisons it becomes problematic, as the respondents can only comment on what they subjectively perceive to be important in their particular country.

Despite this limitation, these indicators seem to reflect reality. As one would expect, there are vast differences amongst Asian countries on this aspect of the Economic Freedom of the World report. While Singapore, Japan, Hong Kong and Malaysia rank fairly highly (17, 21, 26, 37 respectively), there are many countries in the region where the rule of law is very weak, such as Bangladesh, Nepal and Pakistan (112, 117, 119). Myanmar, unsurprisingly, provides the worst case occupying place 120 in the Index.

Most observers would find little reason to dispute these figures, and while it is hoped that we are able to achieve a more objective measure of the rule of law in future, the “Legal Structures and Property Rights” indicator of the Economic Freedom of the World report is a good start in the right direction.