What Does the Rule of Law Variable Measure?
| Peter Klein |
Bill Easterly poses this question, referring to his NYU colleague Kevin Davis’s work on law and development. Davis has several papers criticizing economists’ use of rule-of-law variables in development research (1, 2, 3). As summarized by Easterly:
Kevin points out that two current measures of “rule of law” used by economists in “institutions cause development” econometric research are by their own description a mixture of some characteristics of the legal system with a long list of non-legalistic factors such as “popular observance of the law,” “a very high crime rate or if the law is routinely ignored without effective sanction (for example, widespread illegal strikes),” “losses and costs of crime,” “corruption in banking,” “crime,” “theft and crime,” “crime and theft as obstacles to business,” “extent of tax evasion,” “costs of organized crime for business” and “kidnapping of foreigners.” Showing that this mishmash is correlated with achieving development tells you what exactly? Hire bodyguards for foreigners?
What if “institutions” are yet another item in the long list of panaceas offered by development economists that don’t actually help anyone develop?
Easterly opens with a clever example of a legal rule that doesn’t make sense outside an informal, non-rule context. But overall I think he’s a little unfair to the development and financial economists working in this area, many of whom are sensitive to these problems but are doing the best they can with the data available. It’s true, however, that much of the early work, particularly in the LLSV tradition, conflated de jure and de facto rules (particularly in over-emphasizing differences between common-law and civil-law countries). Benito Arruñada’s critique of the Doing Business Project is also informative in this regard.