REGIONAL COOPERATION AND ECONOMIC INTEGRATION

PART IV:
4. The rule of law and independent judiciary (the quality of legal institutions) -
prerequisites for economic development, regional cooperation and economic
integrations
The rule of law is usually thought of as a political or legal matter. But in the past ten
years the rule of law has become important in economics, too. Indeed, it has become the
motherhood and apple pie of development economics. The rule of law is held to be not only
good in itself because it embodies and encourages a just society, but also a cause of other
good things, notably growth.
Until recently, the rule of law was regarded as a matter of political and moral philosophy
while neoclassical economists paid little or no attention to the rule of law in the course
of economic analysis. Thanks to the contributors of Austrian school of economic thought
and institutional economists, the rule of law was shown as an influential motherhood in
economic development. Douglass C. North, a distinguished recipient of the Nobel prize
in economics back in 1993, demonstrated the significance of the rule of law in his book
“Institutions, Institutional Change and Economic Performance” where he wrote that
the inability of societies to develop low-cost effective institutions capable of reducing
transaction costs is the very reason of economic stagnation in both historical and current
perspective. The rule of law and the ability of institutional flexibility were recognized as a
driving vehicle in the process of economic growth and development.
In economics, the idea of the rule of law was initiated by two distinguished economists.
In his book, The Constitution of Liberty, Friedrich August von Hayek wrote that the aim
of the rule of law is to set a basic framework of general rules perceived without coercive
action (Hayek, 1998). Simply, the more specific the law becomes, the higher the magnitude
of coercion. In 1690, enlightenment philosopher John Locke captured the essence of the
rule in a brilliant sentence: “Wherever law ends, tyranny begins” (Lok, 2002, pp. 339).
Current economic issues confirm that Hayek and Locke were right. When Asian crisis
(1997-1998) deflated the expectations of the right policies, the essence of the rule of law
became obvious. Without a low-cost institutional setting of policymaking based on the
rules rather than discretionary action, no macroeconomic reasoning may give desirable
results.
The rule of law is a goal of development policy. There is no economic development and
growth without economic freedoms, which guarantee the rule of law. Therefore, the rule
of law is a condition for economic growth and development. Economic growth, political
modernization, the protection of human rights, and other worthy objectives are all believed
to hinge, at least in part, on the rule of law. Policymakers in developing and transition
nations are thus seeking ways to establish or strengthen the rule of law in their countries.
Investment rating services, non-governmental organizations, and other students of
development are producing indices that try to measure the degree to which a nation enjoys
the rule of law.
It is widely believed that well-functioning law and legal institutions and a government
bound by the rule of law are important to economic, political and social development. As a
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