Wealth depends on the rule of law

If you want to get rich, you need economic growth. To create economic growth, you need people to be creative, to produce things, and to bring them to market and exchange them. But producing and creating things needs investment – education, training, buying capital equipment, and so on. That’s risky, because your business may not work and you could lose money. But if you have no secure rights over your own property, it’s suicidal. That is why you need property rights and the rule of law.

Property rights are the rules on ownership, use, and transference. It’s not just physical property like land – it could be rights like licences to develop something, hunting or fishing permits, and many other things. These are property, and their use is protected by formal laws like contract laws and property titles, but also by informal rules of custom and tradition. And those take time to build up. Sometimes centuries. The vital thing is that these rules must be enforced. You can enforce your own right of ownership by putting locks on the doors, but you need the authority of government too, to maintain the land registry and settle disputes; and that requires impartial and efficient courts. Governments have to get this right. Where there is no rule of law and proper enforcement of property rights, the rich do just fine – they can afford protection. But everyone else suffers. Too many countries have, not the rule of law, but the rule of men. When you have to get specific permission to do something, like start a business, then you depend on the officials who wield that authority. It is a formula for delay, bureaucracy – and corruption. Under the rule of law, by contrast, the rules of property are known, established, accepted and respected. Even the poorest people are protected by the same rules. And the government too has to work within the rules – there can be no arbitrary arrest, confiscation of property, or retrospective changes in laws and contracts. The rule of law and property rights work because they encourage people to take the risk of investing in themselves and their property. Private ownership also makes it more likely that property will be improved. If you rent a house, you have no reason to keep it in good repair or build a new room. If you own that house, then you know that the value you invest in repairs and improvements will come back to you when you sell it. The same in business: if you are working for yourself, you will make great efforts, becuase you could build up a business that will make you better off. But if you work for someone else, there is no reason to exert yourself more than you have to. Furthermore, if people have secure ownership of assets, they can borrow aginst them. That means they can build up the capital they need to start a new business and create employment and prosperity. In third-world countries, where people cannot enforce their ownership even of their own homes, they have no asset they can borrow on, and therefore they have no access to the banks nor ability to buy labour-saving capital equipment. Sound property rights make life a lot easier for the poorest, and open up opportunities for all – not just the rich. I know you have many problems in your legal system. I think many of them could be eased with very small changes in the rules, and by looking at best practice from other countries. But you need to clear that backlog, and do it fast, if you are to join the EU in five years’ time. Even more importantly, you need to do it because the rule of law is fundamental to building a market economy. You do not want to waste your energy on disputes about property. You want people to be secure in their ownership of assets, so that they improve them. You want the poorest people to acquire capital on the basis of a solid property right. That is the only way to create value, growth, and prosperity, and to spread genuind economic power throughout your population. Adam Smith, the eighteenth-century economist, wrote that prosperity depends only on peace, low taxes, and a good system of justice. Peace has not been easy to come by in your region. Tax reduction still needs a lot of work, though countries like Slovakia have shown the way. But you really must set to work on your justice system, and on speeding up the protection of property right, if you are to have any hope of future prosperity. Dr Eamonn Butler is Director of the Adam Smith Institute.