Lawless economy.
How does a weak "rule of law" limit long-term investment?
Said Abul Qasimi / author of the publication.
Political economy emphasizes that without the rule of law and valid property rights, social trust is lost and the required investment does not materialize as it should. Productive investment, whether it is at the level of a pharmaceutical factory or the establishment of a renewable power plant, or at the level of research and development of new technologies, deals with the theory of irreversible investments. Entrepreneurs and investors have the power to predict the situation and conditions in order to turn their liquidity into a fixed and physical asset. If the rules of the game depend on arbitrary decisions, overnight decrees or even non-independent courts, physical assets become institutional hostages.
The Atlantic Council's comprehensive report, based on measuring 30 years of data from 164 countries around the world between 1995 and 2024, overturns many conventional assumptions by using the Freedom and Prosperity Index. Based on the findings of this report, the rule of law is not a luxury item produced after development and is more like a hard core that can initiate sustainable developments. The findings of this study show that of all the components, the rule of law has the highest and most significant correlation coefficient with various welfare indices. Based on these data, the correlation between the rule of law and per capita income is equal to 0.72.
Based on the Atlantic Council's 30-year report data, the global rule of law index over the past 11 years has always had a downward and eroding trend. This alarming decline caused the welfare index to reach its lowest level in the last two decades. The main reason for this event was the decrease in the numbers related to the clarity and transparency index of the laws, which was registered in various countries in the world and caused the recognition of structural damage among the members of the Organization for Economic Cooperation and Development and developing countries.