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14 UNIVERSITY OF BOTSWANA LAW JOURNAL DECEMBER 2010 entrepreneurship and economic growth. Private property rights are protected in this way from being violated by government officials or arbitrary laws. Individuals who are not secure in their property lack the incentive to undertake investment or engage in entrepreneurship. Individuals and businesses must be confident that their efforts will not be wasted before they will engage in commerce, save income, and make long-term plans. The Rule of Law provides a stable system of protection within which people can engage in economic activity and have the incentive to do so. Investors are particularly concerned about the prevalence of law and order, the burdens of arbitrary regulation, and the possibility of expropriation. The amount of investment in countries without the security provided by the Rule of Law is severely restricted, limiting the possibility of economic expansion. A well functioning legal system is also a key determinant of capital accumulation. An ever growing capital structure is essential for a vibrant, growing economy. Hernando De Soto, in his groundbreaking work, “The Mystery of Capital,” argues that the degree of capital formation in an economy depends largely on a country's legal system, specifically, how easy or difficult is it for a landowner to establish clear, recognized legal title to his land. 49 For only with clear, legal title, De Soto argues, can small-time landowners, who comprise a large component of every economy, “capitalize” on their land, their main asset, and become able to acquire the funds and tools that they need to be more productive and to contribute to further capitalization of the larger economy. No country can develop without economic freedom and the protection of private property rights. The Rule of Law, by providing the framework for protecting private property and individual freedom, creates the stability and predictability in economic affairs necessary to promote entrepreneurship, saving and investment, and capital formation. It is nonsensical to expect that foreign aid will lead to economic development in Africa without addressing the institutional factors, such as the lack of Rule of Law, which are responsible for Africa’s failure to develop in the first place. 4. EMPIRICAL EVIDENCE In our consideration of the role that a well functioning legal system plays in protecting private property rights we have seen that the Rule of Law should be an important determinant of economic performance. It is obvious from simple observation that countries that secure the Rule of Law have much more productive economies than those that do not. This everyday experience is formalized and confirmed by evidence from the Fraser Institute’s economic 49 H. De Soto, The Mystery of Capital, (Basic Books, 2000).
FOREIGN AID, THE RULE OF LAW AND ECONOMIC DEVELOPMENT IN AFRICA 15 freedom report, Economic Freedom of the World. 50 Area 2 of the Fraser index, Legal System & Property Rights, provides an annual estimate of the realization of the Rule of Law principle in 123 countries. Countries are ranked according to the security property rights, the independence of the judiciary, and the impartiality of the court system. The scale ranges from a score of one for countries with no Rule of Law up to a score of ten for countries that perfectly secure the Rule of Law for all of its citizens. Chart 1 divides the Fraser index scores for 121 countries in 2004 into quintiles and compares them with the average level of GDP per capita, measured by the World Bank according to the Atlas method. 51 The countries in the top quintile of the Legal System and Property Rights scores had an average per capita income of $29,122 in 2004, while those in the bottom quintile averaged only $2561. The chart bellow shows a strong relationship between the Rule of Law and per capita income. Relation Between Rule of Law and GDP Per-Capita GDP/CA 35000 30000 25000 20000 15000 10000 5000 0 Top 2nd 3rd 4th Bottom Legal System and Property Rights Quintiles This snapshot view of the relationship between the Rule of Law and GDP per capita is reinforced by data from the Heritage Foundation’s Index of Economic Freedom. 52 The index ranks the security of private property on a score from 1, being the best, to 5, the worst. In a sample of 143 countries for 2004, those that had a property score of 1 averaged $30,505, while those countries with a score of 5 averaged only $2,953. 50 Gwartney and Lawson, note 45 above. 51 Income statistics are from the World Bank (2005): GDP per capita 2004, Atlas method and PPP, World Development Indicators database, World Bank, www.worldbank.org./data/wdi/. 52 The Heritage Foundation & Wall Street Journal, Index of Economic Freedom: 2006 Annual Report (Heritage Foundation, 2006).
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