The Rule of Law (RoL), traditionally viewed as a philosophical ideal, has transformed into a global enterprise encompassing aid agencies, international institutions, and legal reformers. Beyond its normative significance, RoL is increasingly recognized as a foundational component of economic growth. It is like the ultimate referee in the global game of governance, keeping arbitrary power in check and ensuring fairness in every play.
The relevance of the RoL transcends theoretical boundaries. It is widely recognised in both scholarly and policy circles as integral to advancing a host of objectives, including justice, democratic consolidation, international cooperation, and notably, economic development. As articulated by the World Justice Project (WJP), societies with weak adherence to the Rule of Law frequently face severe governance failures, ranging from ineffective public health delivery, undermining investor confidence, unchecked violence to legal inequality and diminished foreign direct investment.
While the RoL is instrumental in achieving such outcomes, it is increasingly understood not merely as a means to other ends, but as an independent normative good essential for sustainable development. A legal order grounded in impartiality, transparency, and accountability constitutes the bedrock upon which modern economies are built.
The Legal-Economic Nexus
Economic growth hinges on many factors, but a key pillar is the rule of law. Adherence to legal principles fosters a climate of trust, enabling free trade, investment flows, and international commerce to flourish. A country’s commitment to legal frameworks is directly linked to its levels of innovation, inward investment, and economic expansion. At the heart of the relationship between law and economic development lie two closely connected but distinct ideas: first, that secure property rights encourage investment, and second, that contract enforcement makes trade possible. These ideas aren’t new, you can find their roots in classic political economy, where the state is seen as the arbitrator making sure people play fair with both property and promises.
Building Prosperity Through Rights-Based Economies
The protection of property rights and contractual obligations ensures that markets function efficiently, reducing risks for businesses and investors. It ensures individuals and firms can utilise, invest, and transfer assets without fear of arbitrary seizure.
Take property rights, for example. If you own $100, you should have the right to spend, invest, or safeguard it as you see fit. The same logic applies to businesses and individuals entering contracts – without legal enforcement, transactions become high-risk gambles. Imagine a world where surgeons operate without the assurance of payment or where businesses hesitate to sign deals fearing non-compliance. Economic stagnation would be inevitable, and the sustenance of the society itself would be in jeopardy.
Building on this, Acemoglu & Johnson (2005) took things a step further and found that the impact of strong property rights on things like economic growth, investment, and financial development is even more significant than the impact of institutions that simply ensure contracts are honored. Other studies widened the scope, too. Hall & Jones (1999) linked property rights to productivity, while Claessens & Laeven (2003) focused on investments in fixed assets. The point? Property rights aren’t just about ownership, they ripple through the economy in all sorts of ways.
So what are property rights, exactly? They’re social rules that lay out who gets to do what with which resources, think individuals, firms, and governments. And they’re not just a single right, but a bundle: some relate to control (who can use the resource), others to income (who gets the benefits). Contracts, meanwhile, are just as vital. Some trade can happen on the spot like bartering apples for oranges but more complex deals, especially in finance, need trust over time. That’s where legal contracts step in.
The link between these institutions and economic development hinges on incentives. If people feel confident that their property is safe and that promises will be upheld, they’re more likely to invest, trade, and take economic risks. It’s also the key to resource allocation, secure rights and contracts that let financial markets grow and operate more efficiently.
Overall, there’s a solid consensus that property rights matter, supported by both global comparisons and detailed survey work. But, of course, there’s a twist. Some scholars argue that secure property rights don’t just emerge out of nowhere. They may depend on underlying political structures or need to be backed by other strong institutions to really work.
Corruption: The Silent Saboteur
And then there’s corruption. In some rare cases (like dodging a harmful tariff), corruption might ironically make things run smoother. But most of the time, it undermines everything law and economics are trying to build. If people don’t trust the courts, they stop using them and that drives up the cost of settling disputes. Corruption also diverts resources into rent-seeking (unproductive lobbying and bribery), raising costs and hurting producers and consumers alike.
Worst of all, corruption distorts the long-term structure of the economy. It leads to monopolies, limits market entry, misallocates government spending, and allows private actors to loot companies through bad management. All of this chips away at the very foundation of sustainable growth.
Global Indicators and Trends
Institutions like the World Bank and the WJP have made considerable strides in quantifying RoL. The Worldwide Governance Indicators (WGI) and WJP Rule of Law Index provide data-driven snapshots of legal efficacy across nations.
The World Bank’s WGI evaluates legal systems on metrics such as regulatory quality, rule of law, and control of corruption, using inputs from over 30 global organizations. Countries are ranked on a 1–6 scale, where higher scores indicate stronger legal infrastructure. The data sources reflect the diverse views of tens of thousands of survey respondents and experts worldwide. Whereas, the WJP Rule of Law Index is a quantitative assessment tool designed to offer a comprehensive picture of how well countries adhere to the rule of law in practice. It uses a methodology that assesses countries based on nine factors and 47 sub-factors.
Notably, the correlation between legal robustness and economic outcomes is consistently reflected in global rankings. In 2012, Afghanistan, the Central African Republic, and Zimbabwe scored the lowest on property rights protection, unsurprisingly, their GDP per capita was among the lowest worldwide. The takeaway? Weak legal structures lead to economic paralysis.
India: A Case of Modest Progress
The WJP Rule of Law Index, has painted a concerning global picture: for the seventh consecutive year, RoL has deteriorated in most countries. In 2024, 57% of surveyed nations saw declines, largely due to growing authoritarian tendencies. However, India was one of the few exceptions, registering a marginal improvement and ranking 79th out of 142 countries globally. Since 2016, a global rule of law recession has affected 77% of countries studied, including India. Its overall rule of law score increased by less than 1% in this year’s Index.
Despite the concerning downward trends in fundamental rights and constraints on government powers, there’s a silver lining: the global fight against corruption has gained some ground. Between 2023 and 2024, 59% of countries improved their corruption scores, including India. This highlights the ongoing effort to uphold legal integrity despite broader challenges.
The top five nations in the 2024 WJP Rule of Law Index – Denmark, Norway, Finland, Sweden, and Germany illustrate what strong legal foundations can achieve. Conversely, the lowest-ranked Venezuela, Cambodia, Afghanistan, Haiti, and Myanmar demonstrate the dire consequences of legal instability.
Despite these setbacks, the marginal global gains in curbing corruption offer a glimmer of hope. As emphasised by WJP Co-founder William Neukom, continued investment in legal integrity is essential, not just for economic performance but for the broader health and legitimacy of democratic institutions.
Why Rule of Law Still Rules
The evidence is clear: economic development and the rule of law are not parallel tracks, they are interdependent paths. Markets cannot flourish where rights are insecure and promises unenforceable. Nor can innovation thrive in environments plagued by legal ambiguity or arbitrary governance.
Yet, while institutional development is a long and complex process, it is not without hope. The modest gains made by countries like India, and global improvements in anti-corruption measures, demonstrate that progress is possible.
As we look toward an uncertain future, recommitting to the principles of the rule of law is not just a legal imperative but an economic necessity. And if we’re lucky, it might also make the world just a bit fairer and perhaps even a little richer in more ways than one.
In the grand experiment of human progress, it seems that laws, like good coffee, must be strong, well-grounded, and universally applied. Without them, economies falter, rights erode, and the social contract starts to resemble more of a vague suggestion than a binding agreement. So here’s the rule of law: boring on the surface, essential at the core, and if done right, absolutely indispensable for a future worth investing in.