Economic Uncertainty and the Role of the Courts
Mahoney, Paul G., Harvard Journal of Law & Public Policy
This Article addresses economic uncertainty and the role of institutions in securing property rights. We know a lot more about the former than we do about the latter. That is to say, we know about the effects of uncertainty, especially uncertainty about property rights, on the economy. (1) We know less about the extent to which institutional arrangements can guarantee security of property and less still about whether they can create secure property rights where such rights do not already exist.
There are very strong theoretical reasons to believe that property rights are a first-order determinant of the health of the economy. Adam Smith linked investment and growth to the security of property. (2) It also seems reasonably clear that the security of property rights is connected to the structure of government. When we compare societies around the world with despotic governments to those with limited governments, the latter usually have better property rights and are usually more prosperous. (3) Examples include the Netherlands before and after independence from Spain in the seventeenth century (4) and Zimbabwe and Botswana today. (5)
We can look at the question more systematically, and many scholars have set out to do just that. (6) I will accordingly draw on a large body of work to which many scholars have contributed.
A simple starting point is whether, in the world today, the security of property rights is associated with economic prosperity. We cannot answer that question, however, from the statute books alone. In general, non-Communist countries have formal protections for property rights. Even if the formal rules about property are the same in Luxembourg and Paraguay, however, most observers would share the intuition that property is more secure in Luxembourg.
In addition, I must use the term "property rights" loosely because there are many things a government can do to interfere with property rights besides outright theft. It can regulate to the extent that property can no longer be used profitably. (7) It can devalue the currency to the point where paper assets become worthless. It can allow politically favored entities to play by different rules than everyone else. Thus, I will use the terms "property rights" and "economic freedom" to refer broadly to the absence of those forms of interference.
Various organizations and scholars try to measure the de facto security of property rights. Companies like Political Risk Services create survey-based measures for private sector clients who invest abroad. (8) The Heritage Foundation calculates an index of economic freedom that incorporates some of the above forms of interference with property rights. (9) In general, economic freedom scores correlate quite strongly with economic prosperity. (10) Interestingly, the correlation between prosperity and economic freedom is even stronger than that between prosperity and measures of political freedoms. (11)
Compare, for instance, Morocco and Singapore. Both have parliamentary governments, (12) and both governments are somewhat intolerant of dissent. (13) The two countries have identical scores on Freedom House's Indexes of Political Rights and Civil Liberties, two of the most common measures of political freedom. (14) Singapore, however, scores much higher than Morocco on the Heritage Foundation's index of economic freedom. (15) Singapore is a much wealthier country. Indeed, its per capita GDP is more than ten times that of Morocco. (16)
But why does Singapore, which has a similar level of political freedom, have more secure property rights than Morocco, or, for that matter, Italy? (17) More importantly, could Morocco become as wealthy as Singapore by altering its governmental structure in a way that would limit its ability to interfere with property and other economic rights?
One traditional answer, given by Montesquieu, is to constrain governmental power through institutions such as federalism or an independent judiciary. …