Rule of Law and its Economic Implications

If one were to look at the factors of production (land, labour, capital and enterprise) and look at the corresponding cases pending in Indian courts, one can have a very good understanding of the performance of the institutions arranged around these factors. it is no wonder that any task of economic reforms will have to take cognizance the improvement of the legal institutions. As of now, there are no standards for determining the quality of judgments passed by courts. Case pendency itself is taken as a sign of performance though I would argue that it is not a good enough indicator. However I am digressing from the point. If I remember Amir Ullah Khan and Bibek Debroy’s analyses well, land and labour disputes form the bulk of pending cases, and even there the government is the main litigant. No surprise that capital investment and enterprise suffer.

Read Wolfgang’s study on Economic Consequences of a Weak Judiciary: Insights from India and his abstract

This paper examines the empirical relationship between the quality of the Indian judiciary and the economic development of the Indian States and Union Territories…The data indicate that a weak judiciary has a negative effect on economic and social development, which leads to: (i) lower per capita income; (ii) higher poverty rates; (iii) lower private economic activity, (iv) poorer public infrastructure; and, (v) higher crime rates and more industrial riots. The results are robust and the correlations are strong and negative.

Also read Matthieu Chemin’s study Does the quality of the judiciary shape economic activity? Evidence from India and his abstract

There were 3.1 million cases pending in India’s 21 High Courts and 20 million in its subordinate courts in 2000. This paper examines the consequences of a slow judiciary on the contracting behaviour of firms in India…I [then] examine how the case pendency rate in state courts in India affects the contracting behaviour of 170,000 small non-agricultural informal firms…My estimates suggest that a slow judiciary implies more breaches of contract, discourages firms from undertaking relationship-specific investments, impedes the access of firms to formal financial institutions, and favours inefficient dynasties. The negative implications of having an inefficient judiciary are large – moving a firm from the highest to the lowest pendency state would result in a 10% improvement in firm performance.