GDP Growth More Strongly Correlated with Rule of Law than Anything Else …
Economist Woody Brock says that a nation’s GDP growth is based mainly on whether or not it follows the rule of law.
Economist and investment adviser John Mauldin notes:
I had dinner with Dr. Woody Brock this evening in Rockport. We were discussing this issue and he mentioned that he had done a study based on analysis by an institution that looks at all sorts of “fuzzy” data, like how easy it is to start a business in a country, corporate taxes and business structures, levels of free trade and free markets, and the legal system. It turned out that the trait that was most positively correlated with GDP growth was strength of the rule of law. It is also one of the major factors that Niall Ferguson cites in his book Civilization as a reason for the ascendency of the West in the last 500 years, and a factor that helps explain why China is rising again as it emerges from chaos.
One of the very real problems we face is the growing feeling that the system is rigged against regular people in favor of “the bankers” or the 1%. And if we are honest with ourselves, we have to admit there is reason for that feeling. Things like LIBOR are structured with a very real potential for manipulation. When the facts come out, there is just one more reason not to trust the system. And if there is no trust, there is no system.
Dr. Brock is not alone. Economists have thoroughly documented that failure to enforce the rule of law leads to a loss of trust … which destroys economies.
This is true whether it is in the West, in Nigeria or any other country.
We’re Number … What?
Economic historian Niall Ferguson notes:
The World Economic Forum’s annual Global Competitiveness Index and, in particular, the Executive Opinion Survey on which it’s partly based … includes 15 measures of the rule of law, ranging from the protection of private property rights to the policing of corruption and the control of organised crime.
It’s an astonishing yet scarcely acknowledged fact that on no fewer than 15 out of 15, the United States now fares markedly worse than Hong Kong. In the Heritage Foundation’s Freedom Index, too, the U.S. ranks 21st in the world in terms of freedom from corruption, a considerable distance behind Hong Kong and Singapore. [Transparency International puts the U.S. at 24th.]
Perhaps the most compelling evidence of all comes from the World Bank’s Indicators on World Governance, which suggest that, since 1996, the United States has suffered a decline in the quality of its governance in three different dimensions: government effectiveness, regulatory quality and the control of corruption.
Compared with Germany or Hong Kong, the U.S. is manifestly slipping behind.
Indeed – as we’ve extensively documented – the rule of law is now as weak in the U.S. and UK as many countries which we would consider “rogue nations”. See this, this, this, this, this, this, this, this, this, this and this.
This is a sudden change. As famed Peruvian economist Hernando de Soto notes:
In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.
How Did We Slip So Fast?
Of course, the repeal of the basic laws which enforced the rule of law among financial players is a part of the problem. Virtually everyone – other than those currently working for the big banks or on their payroll – is calling for reinstatement of the separation between banking and speculative gambling.
Free market libertarians – like everyone else – are demanding prosecution of criminal fraud using basic fraud laws. Yet the government has made it official policy not to prosecute fraud.
People have lost trust in the system, because government corruption is as widespread as Wall Street corruption … and many of those in power in D.C. have the same sociopathic traits as those they supposedly regulate on Wall Street.
And as Professor Ferguson notes, draconian national security laws are one of the main things undermining the rule of law:
We must pose the familiar question about how far our civil liberties have been eroded by the national security state – a process that in fact dates back almost a hundred years to the outbreak of the First World War and the passage of the 1914 Defence of the Realm Act. Recent debates about the protracted detention of terrorist suspects are in no way new. Somehow it’s always a choice between habeas corpus and hundreds of corpses.
Of course, many of this decades’ national security measures have not been taken to keep us safe in the “post-9/11 world” … indeed, many of them started before 9/11.
And America has been in a continuous declared state of national emergency since 9/11, and we are in a literally never-ending state of perpetual war. See this, this, this and this.
In fact, government has blown terrorism fears way out of proportion for political purposes, and “national security” powers have been used in many ways to exempt big Wall Street players from the rule of law rather than to do anything to protect us.
Is it any wonder that we’re still in an economic crisis?
Category: Think Tank
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
Barry, an excellent post about one of the eternal verities…when the leadership of a culture abandons the humility of submission to just laws, the nation suffers and ultimately dies if not corrected.
Not to belittle the problem of corruption, which kills freedom, subverts democracy and is very hard to remove once it takes hold, but the idea that corruption kills the economy is patently absurd. One needn’t look further than China or India to see that extremely corrupt nations can have fast-growing GDP. Clearly there are conditions to be met before we can discuss the consequences of corruption on GDP growth – and they will have to distinguish between different kinds of corruption, as well as different kinds of GDP growth.
In Europe generally, judges are civil servants; they are basically academicians who are selected by merit without political interference. In the United States generally, a judgeship is a political reward; and the higher the court, the greater the reward’s value and political control. Politics have corrupted our judiciary; and the courts have returned the favor by corrupting politics. Every authentic constitutional scholar knows what a travesty Bush v. Gore was (The Court ruled, inter alia, that counting the Florida votes would constitute an irrevocable injury to Bush; but not counting the votes would not constitute a similar injury to Gore). Subsequent to that decision, the “non-activist” Court has been on an orgy of overturning accepted precedent and law, including those restricting corporate funding of elections. As a result, virtually unlimited corporate money has been let loose into our political process. To most politicians, the power which comes with being elected is their most valued possession. And, those in high office who support the interests of the 1%, can now count on virtually unlimited funds to help them obtain/retain that most valued possession. This reciprocal corruption between the courts and politics is really what has brought us to where we are today.
The so-called “official policy” cited here wholly misses the Big Picture, if you will.
The link leads to a link, which leads to a link, which cites ‘defered prosecutions’ I don’t know about you, but I would rather have my money back from a Madoff-like crime than see him behind bars for three hundred years. In addition, implementing corporate reforms in lieu of jail time is BETTER for us in the long run in cases where systemic issues allow for these rip offs, especially given how ignorant the juries are out their in TV land …American TV WATCHING land that is. And guys like Angelo Mozilo, Hank Greenberg, Dick Fuld have been hurt bad. Does actual jail time for these plea barginers really mean that much to you? I’d rather have my money, restitution, and systemic fixes.
Holder? Rule of Law?
Ha.
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