It has become conventional wisdom amongst most economists that, whatever else the state does, it should provide effective institutions and processes to protect private property rights and enforce contracts, which are regarded as prerequisites to efficient and dynamic market economies.1 On this view of the rule of law, law plays a critical instrumental role in promoting economic development and should be accorded the highest developmental priority. In this chapter, we address the property rights protection pillar of this conventional wisdom (section 5.1), then we turn to the contract rights pillar (section 5.2). Going beyond contracts and property rights, we briefly review a wide range of other determinants of the vitality of the private sector in developing countries (section 5.3). Finally, we discuss the importance of an instrumental perspective on the rule of law to promote other goals, such as environmental protection (section 5.4).
Perhaps most reflective of the importance of property rights in contemporary thinking on economic development has been the success and influence of Hernando de Soto’s book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. He argues that strong protection for private property rights is the key factor in explaining the economic success of the developed world and the economic stagnation of many developing countries. On de Soto’s account, the potential benefits of formalization of property rights are substantial. De Soto claims that “the total value of the real estate held but not legally owned by the poor of the...
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