New Horizons in Law and Economics series
1. INTRODUCTION The importance of an effective legal and justice system for economic development is now beyond dispute. Economists have highlighted the importance of securing property rights and the enforcement of contracts for economic development at least since the writings of Adam Smith.1 Legal institutions do not have a complementary or incidental role in economic development but are a fundamental requisite for the functioning of a market economy.2 This factor is now acknowledged by lawyers, economists, political scientists and members of international donor institutions alike. Failure to guarantee and enforce legal rights and norms is economically devastating. For example, where courts do not enforce contractual obligations, there is a general unwillingness to enter into anonymous (market-based) exchange, leading to a loss in productivity and seriously hindering long-term economic development. Where the judiciary is ill-functioning, firms wishing to do business in these countries must operate with scant legal protection which injects great uncertainty into activities, increases transaction costs and opens up possibilities for opportunism.3 In such an environment it becomes impossible to secure international investment, as investors have no means to secure their capital. Any policy for attracting foreign investment – by reducing taxes or facilitating the entry and exit of capital – is of little use where investors face numerous problems in recovering debts, owing to an inadequate and inefficient judicial administration. The relationship between justice and the economy is one of mutual dependency. Whilst a given judicial structure can facilitate or frustrate economic development, the latter may also permit the improvement...
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