Rule of Law and Economic Growth (Importance of Institutions, Property Rights)

In this article, we will understand the importance of institutions and its role to implement rule of law in a country for long and sustainable economic growth. In any country, rule of law is the key to regulate system and societies and ultimately make conditions favorable for businesses to grow. At the same time, it also has to take care of the consumer interests to make economy properly function in the longer run. Before going further, let's first understand what are Institutions ?


What are Institutions ?

Institutions are law-making and law-preserving authorities that provide a system to make justice attainable and accessible to all citizens. These institutions are also responsible for making international policies and deciding their foreign relations with other countries. There are mainly two types of institutions formal and informal institutions. The formal institutions are easier to observe than the informal institutions. Both informal and formal institutions rely heavily on each other for the providence of law.


Rule of Law and Economic Growth (Importance of Institutions, Property Rights)

Rule of Law and Economic Growth (Importance of Institutions, Property Rights)

Also Read: New Growth Theory (Romer and endogenous growth) with examples

The rule of law is a reliable and extensive system of regulations, values, norms, and the commitment of society and institutions. The following are the benefits of following the rule of law.

  • Accountability: the rule of law ensures that institutes, the government, and the private sectors are. having proper regulations and laws keeps all individuals on track. Without laws and proper accountability, no country can progress.
  • Just regulations: the laws and regulations must be made clear, public, and equal for all. Every field of life and profession requires a set of strict laws which must be followed by all to maintain fairness and justice. There must be serious punishments and accountability for those who break these laws and cause harm to the system.
  • Fair government: when laws and regulations are in place, it becomes easier for the government to reign. The government is also bound to comply with the law, there are strict rules in place to make sure that the people in power are responsibly performing their duties.
  • Timely justice for all: Justice on time is very crucial for laying the foundation of a community. The institutions of the country must be trained to make justice accessible and equal for all. Justice delayed is justice denied.


World Justice Project

The above-mentioned factors of the rule of law are studied and calculated to maintain the world’s justice project rule of law index. The project focuses on gathering statistical data and information. Currently, the survey relies upon more than 150,000 different households and almost 36,000 different law practitioners from around the world to gather data internationally and to study of rule of law conducted in various parts of the world. This data can be very beneficial for different professions such as academic studies, for policy-making authorities to fill the gaps in the system, for businessmen to strategically plan goals, legal professions, and the common citizens.


Property Rights and Its Importance for Economic Growth

Property rights are very important for agriculture and farming. Many underdeveloped countries depend upon their agriculture sector for its economic growth. Property rights and regulations have come in place to cancel out feudal systems which previously had many negative impacts on overall economic growth. But there are still many parts of the world where landlords own huge portions of the land and force the poor to work for them on minimum wages. This is unfair to many farmers and cultivators. This factor is still a hindrance to the economic growth of many countries. Property rights and regulations restrict a person from owning more than a certain portion of the cultivated property.

It has been observed over the years and proved through studies that high-income countries provide incentives to investors and businessmen in the form of secure private property rights. proper property rights and laws also allow the government to keep a track of the wealth of citizens and collect taxes.


Importance of Rule of Law for the Success of a Country

The importance of rule of law for the success of a country is vital, no nation can progress until it practices fair and just law. It is also assumed by many famous economists that the rule of law is essential for economic growth. But this concept of rule of law is very multi-layered and multi-dimensional. The main components of rule of law include providing security to people, and property rights, keeping the government accountable and controlling any sort of corruption. There is a correlation between institutions, rule of law and economic growth. Institutions make sure that the rule of law exists and as a result rule of law brings about economic prosperity.


Relationship between Institutions and Economic Growth

Institutions make policies which shape the internal and external environment for local and international businesses in the country. Hence, institutions are directly related to the progress of the economic sector. The policies also impact the free markets due to the factors like the freedom to participate in business contracts and compliance with the contracts. Certain laws protect the customers and improve the customer-seller relationship. These laws make it compulsory for traders to be transparent about their products and give accurate and complete information to their customers. In case of any negligence from the side of the seller, the customers can take legal action and sue the companies for any loss.

Furthermore, if the institutions of a state are reliable and stable then it attracts more foreign companies and investors to expand their businesses to the country. International companies carefully observe the security and law enforcement ability of every country before moving their ventures there. When institutions are in place and rules and laws are followed by all then it also improves the living conditions of the common man. There are lesser crimes and trade is smoother. The institute of the country provides it with the basic foundation on which every other process is conducted.

The institutions are also responsible for establishing foreign policy and maintaining relations with other nations. Hence, the international system of imports and exports depends upon the decisions taken by the institutions. The institutions are also responsible for providing favorable conditions for all economic sectors such as providing training programs and modern technology to the farmers, providing electricity and other resources to the industrial sectors, and signing bilateral and multilateral trade agreements. It is institutions such as the government and the central bank of the country that decide monetary and fiscal policies for the achievement of economic goals.

Fiscal policy is dependent on tools like government expenditure and tax whereas, the monetary policy uses interest rate, money supply and exchange rate to keep the economy stable. Hence, a change in political regime can possibly mean new policies and new conditions for businesses. Hence, if the political situation within a country is not stable then no international investors will deem it suitable for business and hence the currency rate will depreciate.



To conclude institutions, law-making agencies and law enforcement agencies all play a very important role in enabling a nation to progress. Strict laws and regulations are the foundation of every society, and all aspects of life are directly related to how well these laws are applied. Economic sectors are dependent on policymakers and these institutes to make the right decisions at the right times. Hence, the prosperity and success of a nation depend on the strength and reliability of its institutions.

Leave a Comment