On the basis of that description the index seems highly relevant to assessment of whether societies have institutions that enable their members to live in peace with one another. (For background on reasons why I am interested in such indexes see: Is a ‘good society’ index a good idea?)


I think it would be more appropriate to describe this index as a legal institutions index than as a rule of law (RoL) index. The rule of law is the ancient principle that no-one, not even the king, is above the law. It possible for a jurisdiction to have a relatively high score on the World Bank’s RoL index even though its legal foundations for rule of law may be somewhat tenuous e.g. Hong Kong. (Someone might be interested in a previous post on the question: Is rule of law an esoteric concept?)


As with the five other indexes in the World Bank’s suite of governance indicators the RoL index is based on perceptions based data reflecting the views of a diverse range of people, including tens of thousands of household and firm survey respondents and thousands of experts working for the private sector, NGOs, and public sector agencies. The aggregation method gives greater weight to indicators that are correlated with each other.


The RoL index seems to cover similar ground to the Legal structure and property rights sub-index (LSPR) of the Fraser Institute’s economic freedom index. Indicators incorporated in the LSPR cover: judicial independence, impartial courts, protection of property rights, military interference in legal and political processes, integrity of the legal system, contract enforcement and regulatory restrictions on sale of property.


The chart below shows how closely the World Bank’s RoL index and the Fraser Institute’s LSPR index correspond to each other. The blue diamonds represent actual indexes and the pink diamonds represent the predicted value of the LSPR index using linear regression.

In later posts relating to good society indicators I will use the World Bank’s RoL index as an index reflecting the quality of legal institutions.

Douglass North, the 1993 Nobel-winning economist once famously wrote the essence of institutional quality for economic development. He said that the inability of societies to develop effective low-cost institutions is the major reason of today’s contemporary underdevelopment of the third world. In terms of the ease of contract enforcement, 3 out of top 10 countries are Iceland, Finland and Norway where institutional quality and the rule of law are on the high level by all international indices and comparison.

In recent decade, embracing free-market ideas has had a significantly positive impact on the institutional quality, regulatory barriers and the overall quality of business environment – all of which affect the size of transaction cost and, by empirical evidence, the standard of living and the wealth of nations. Global economic integration further induced institutional competition in terms of tax structure, regulatory environment, administrative barriers and labor market structures. Thus, when countries such as Georgia, FYR Macedonia, Moldova, Liberia and United Arab Emirates, enacted the liberalization of the business environment, the results were significant ever after. The World Bank also published the list of top 10 reforms in 2010 among which are Rwanda, Kyrgyz Republic, FYR Macedonia, Egypt, Moldova, Belarus, Columbia, United Arab Emirates, Tajikistan and Liberia (link).

The efforts to deregulate and liberalize business environment worldwide, will have a strong impact on high-income countries to remove the existing barriers to trade and investment such as high tax burden, rigid labor market structure and government size relative to private sector. 2008/2009 financial crisis and the growing role of government in the economy will probably deteriorate the country ranking in the next year. However, the leadership in the quality of business and regulatory environment will depend on further liberalization of the business environment, particulary the labor market, which is a major backbone of high-income countries where union density and regulated labor markets are widespread.

If countries such as Italy, France, Germany and the rest of the developed world will hesitate in reforming the remaining barriers to trade, more direct investment flows will move to high-growing emerging markets where macroeconomic stabilization is proceeding and where policymakers impose reforms faster then their peers in the developed world.

If such trend continues, emerging markets will soon reap the benefits and could become the leaders in reforming the business environment, attracting direct investment and, by and large, in economic growth and catch-up with the rest of the world.

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