RULE OF LAW AND ECONOMIC GROWTH

Abstract

Using data from 41 countries for the 2013—2018 period, the dependence of GDP growth on the rule of law index that is calculated by the non-governmental organization World Justice Project has been estimated. Compared to other specialized indicators for assessing compliance with the rule of law, such as the World Governance Indicator, the International Country Risk Guide, or the Index of Judicial Independence, the WJP differs more fully into actual legal practice (not only the quality of legislation) by combining expert judgment with the results of questionnaires surveys of residents of the country. Cross‒regression estimates for the 2013—2018 averages are quite contradictory for the general sample of countries, but a direct dependence of economic growth on the rule of law has been obtained for the countries of Central and Eastern Europe and the former Soviet Union. IfUkrainerose from the current level of the WJP index (0.50) to the level ofGeorgia(0.61), it allows to increase the GDP growth rate by 0.6 percentage points. Estimates for panel data using the a random effects model (RE) confirm the direct relationship between the state of the rule of law and eco‒economic growth for CEE and the former Soviet Union, whereas a weak inverse relationship between the two indicators can be observed in Asia andLatin America. The results show that it is advisable to strengthen the rule of law in transformational economies, while this is not urgent measures in the other studied countries. The overall study does not deny the possibility of economic growth without advancing the legal foundations or deepening the process of democratization of political life, but this does not apply to the CEE countries and the formerSoviet Union. In the extended specification of the regression model, it seems that the favorable influence of the rule of law on GDP dynamics for transformational economies can be realized by slowing down inflation. At the same time, no dependence of inflation on the WJP has been found for Asian and Latin American countries; there is also no effect of consumer prices on economic growth. It is noticeable that estimates for the general sample of countries show the negative impact of only high inflation — over 15% per annum. Among other results, the direct relationship between investment and GDP growth is worth noting, regardless of the regression model chosen. This is in line with the standard assumptions of economic theory and, accordingly, reinforces the argument for the protection of property rights as a means of stimulating the investment process.

Keywords

• rule of law
• economic growth
• panel data