The Economy and Legal Certainty

What does the rule of law have to do with the economy?

Economies do not function through hard work alone; they function through expectations. The spending and investment decisions of a household, an entrepreneur or a multinational company rest on fundamental legal guarantees. Trust that contracts will be enforced, property will be protected, public power will be limited and disputes will be resolved fairly forms the basic foundation of economic life.

Prosperity becomes possible through the “rules of the game” that shape political, economic and social interaction.

The rule of law requires everyone — including businesses and public authorities — to be bound by laws that can be enforced before courts and to benefit from the protection of those laws. This principle enables economic actors to coordinate their expectations and take productive risks.

The rule of law reduces uncertainty, protects rights and ensures that laws do not remain merely on paper. For this, a legal order that can actually be enforced by independent courts through fair procedures is required.

Law is the common language of economic confidence

In countries where the rule of law is strong, a high level of “spontaneous compliance” is observed. In other words, most individuals and institutions obey the law not only because they are forced to, but voluntarily.

In this respect, the rule of law provides a common playbook for the vast majority of economic activity. Many transactions take place without anyone going to court; however, behind those transactions there is a legal order that can step in when necessary.

When these conditions are met, transactions become safer, the flow of credit becomes easier and long-term planning becomes possible. The core conclusion of the report is both intuitive and evidence-based: countries where the rule of law is strong generally reach higher levels of prosperity.

How does the rule of law support economic growth?

At the microeconomic level, the rule of law shapes incentives. Where laws are clear and their enforcement is credible, companies are more willing to formalize their activities, invest, innovate and enter into long-term contracts.

Where the rule of law is weak, economic actors often turn to short-term strategies and informal relationships. The reason is that legal uncertainty and unpredictability increase risk.

At the macroeconomic level, the rule of law supports the overall stability of the economy by enabling resources to be allocated more efficiently by economic actors. This contributes to the deepening of financial markets, improved access to credit and investment capital, and the country becoming more attractive for foreign direct investment.

The report also points to the connection between the rule of law and areas such as the fight against corruption, the effectiveness of public services and democracy. Indeed, the 2024 Nobel Prize in Economic Sciences was awarded to three economic historians who demonstrated the long-term economic benefits of inclusive institutions. The existence of such institutions also largely depends on the rule of law.

Is the rule of law the engine of growth or the guardian of prosperity?

Improvements in legal quality may create stronger growth effects in low- and middle-income countries where institutions are weaker and markets are less developed. In such environments, the rule of law may start or accelerate growth by reducing uncertainty and unlocking private-sector dynamism.

In high-income economies, where institutions are more established, the rule of law often functions as a factor of stability. It prevents the deterioration of the institutional quality that economic actors rely on and helps preserve social trust.

Protecting the rule of law requires caring about access to justice for everyone in society. Problems such as the burden on courts, lengthy proceedings or lack of access to affordable legal support may negatively affect not only individual welfare but also economic productivity.

Exceptions and complex examples

There is a great deal of evidence showing that, in the long term, there is generally a positive relationship between the rule of law and growth. However, there are also different examples that must be considered.

Some economies have achieved strong growth despite institutional weaknesses and low rule-of-law standards. China is one of the examples frequently discussed in this context. Although it ranked 92nd in the 2025 WJP Rule of Law Index, some degree of improvement has also been observed in its general legal structure since the late twentieth century.

At a recent roundtable meeting, representatives of higher courts and the legal profession, economists, public officials and policy experts offered possible explanations for such examples.

Natural resources, a skilled workforce and other growth factors are, of course, important. Investment also plays an important role in this picture. In practice, companies may invest under risky conditions; however, they generally do so when they can price the risks and believe that they can obtain a higher return on investment.

Nevertheless, what exactly explains these growth performances and to what extent they are sustainable in the future requires further research.

Mature legal systems also need protection

The rule of law is a source of resilience; however, it is not an institution that sustains itself automatically. It must be defended, adapted and supported with sufficient resources.

General assessment: The relationship between economic prosperity and the legal order is not limited to the mere existence of courts. A predictable, enforceable and fair legal system supports trust, investment, long-term planning and social stability.