Economic Growth and the Rule of Law: Cross Country Evidence Using a New Set of Indicators

Interest in the possible relationship between economic freedom and economic growth has burgeoned in recent years and most studies have found economic freedom to be conducive to economic growth. Yet, economic freedom is a broad concept that includes very different aspects. The rule of law is a precondition for a high degree of economic freedom. In this paper, it is therefore asked whether it can also be shown to be conducive to economic growth. The rule of law is operationalized by measuring the independence of the judiciary. Politicians might, however, have incentives to renege on judicial independence as declared in legal documents. To take this possibility explicitly into account, two new indicators are introduced: (i) a de iure indicator focusing on the legal foundations of judicial independence and (ii) a de facto indicator focusing on the factually ascertainable degree of judicial independence. An econometric model is estimated on the basis of data from about 70 countries. While de iure judicial independence does not have an impact on economic growth, de facto judicial independence positively influences reald GDP growth per capita in a sample of 56 countries.