University of Botswana Law Journal - PULP

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16 UNIVERSITY OF BOTSWANA LAW JOURNAL DECEMBER 2010 Relation Between Property Rights and GDP Per-Capita GDP Per/C 35000.0 30000.0 25000.0 20000.0 15000.0 10000.0 5000.0 0.0 1 2 3 4 5 Property Score We can glean from these statistics that there is a strong relationship between the status of a country’s economic development and how well private property is protected in that country and the extent to which there is Rule of Law. But the fact that the Rule of Law and development go hand in hand does not establish which one causes which, or if they aren’t both the result of something else entirely. 53 Deduction and economic reasoning, however, tell us that the security of private property and the Rule of Law are primary causes of economic growth. Econometric studies that survey the historical evidence demonstrate and support economic theory, and find that the Rule of Law is an important determinant of economic growth. 54 These generalized findings have been reinforced by individual case studies of African countries. Of particular interest is the recent economic success story of Botswana. For many years Botswana has been one of the world’s fastest growing economies, with an average economic growth rate of 7.7 percent. 55 Without much foreign aid, and in the absence of a large state, Botswana has gone from being the third poorest nation of the world in 1965 to an upper middle income nation today. In an important new case study, economist Scott Beaulier has found that the Rule of Law and comparatively free economic institutions are the major explanations for Botswana’s greater success at economic development than other African countries. 53 Existing studies have established the correlation between components of economic freedom, including the protection of property rights and the Rule of Law, and economic growth, but they have not fully established the arrow of causation. See J. W. Dawson, Causality in the Freedom-Growth Relationship, 19 European Journal of Political Economy 475. 54 See references cited in note 36 above. A recent study decomposing the effects between economic freedom and growth concludes that the component of economic freedom that is significant and has the largest effect on growth is the Legal Structure and Security of Private Ownership. F. Carlson & S. Lundstrom, Economic Freedom and Growth: Decomposing the Effects, 112 Public Choice 335 (2002). 55 S. Beaulier, Look Botswana: No Hands! Why Botswana Should Let the Country Steer Itself, in B. Powell ed., Making Poor Nations Rich: Entrepreneurship and the Process of Development (Stanford University Press, Forthcoming).
FOREIGN AID, THE RULE OF LAW AND ECONOMIC DEVELOPMENT IN AFRICA 17 The sum of this historical evidence points strongly to the conclusion that the Rule of Law is an essential prerequisite for development to take place in Africa. Poor African nations must follow the example of Botswana, and all of the nations that have achieved development, by establishing the protection of private property rights and the Rule of Law. A well functioning legal system is a prerequisite for economic development, without which the poor countries of Africa cannot hope to rise out of poverty. 5. CONCLUSION Foreign aid has been completely ineffective at bringing about development in impoverished nations. A great deal of foreign aid money has been wasted on inefficient and unproductive investments. This waste is not surprising because those in charge of the funds are not subject to the profit and loss test of the marketplace. Given this fact, it is hard to imagine how future aid programs might turn out any better. A great deal of aid money has also been given to tyrannical governments that have used it to suppress and violate the rights of their own subjects. The grave defects of the aid system and the magnitude of the harm that it has caused should cause any well meaning individual to question the logic of the political establishment that is calling for the expansion of aid programs and greater foreign aid spending. Attempting to salvage foreign aid by making it more selective will not fix the problems inherent in foreign aid or make aid effective in bringing about economic development. Aid by its very nature causes waste, corruption, politicization, privilege seeking, and statism, all of which are detrimental to economic development. What countries need for development is an institutional framework that encourages entrepreneurship, hard work, saving, investment and capital accumulation. The institution of private property creates the incentive for individuals to carry out productive economic activity. The Rule of Law establishes a framework in which property rights are respected and enforced. Economic reasoning therefore suggests that the Rule of Law should be an important determinant of economic development. This theory is supported by historical evidence, which shows a strong relationship between countries that secure the Rule of Law and their rate of economic growth. Foreign aid undermines the Rule of Law by engendering corruption and diverting energy from productive to counterproductive endeavors, and therefore undercuts the process of development that it is meant to bring about. The poor nations of Africa remain undeveloped because they lack an institutional environment conducive to economic progress. Suboptimal institutional arrangements have become locked-in, so to speak, and in order to get on the path to sustainable economic growth they must be replaced with institutions that inculcate respect for private property and the Rule of Law.
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