The three primary determinants of economic growth – physical capital growth, human capital growth, and technological innovation – rely on citizens’ confidence that private property rights are secure. Essential to that confidence is the rule of law.
Rule of law is an important catalyst for financial development. It allows for an effective judiciary, which is critical for the enforcement of legal contracts. Shareholders rely on the contractually created limited liability feature of equity to undertake risky, but value-enhancing, investments. That feature is essentially a contract between shareholders and debtholders (and other stakeholders) providing that, when a company’s fortunes sour, shareholders … Read more