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Legal and Political Requirements of Economic Growth with Equity

Legal and Political Requirements of Economic Growth with Equity. By Jeswald W. Salacuse. Proposition no. 1. Effective law is a necessary but not a sufficient condition for economic growth with equity. World Development Report( 2005):.

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Legal and Political Requirements of Economic Growth with Equity

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  1. Legal and Political Requirements of Economic Growth with Equity By Jeswald W. Salacuse

  2. Proposition no. 1 • Effective law is a necessary but not a sufficient condition for economic growth with equity.

  3. World Development Report( 2005): • “The investment climate is central to growth and poverty reduction.” (p.1)

  4. Investor’s Goal • To gain a maximum rate of RETURN at a minimum level of RISK.

  5. Max Weber’s Conditions for the Calculability of Law • 1. The legal text lends itself to prediction. • 2. The administration of the law is not arbitrary. • 3. Contracts are enforced.

  6. Economic and Social functions of Law • 1. Facilitates transaction by providing predictability. • 2. Reduces or increases transaction costs of human activity. • 3. Restores social equilibrium (dispute settlement). • 4. Education.

  7. Legal Devices Necessary for Growth with Equity • 1. Property rights • 2. Contracts. • 3. The Corporation. • 4. Regulation

  8. Property • Something tangible or intangible to which the owner has a legal right. • A legal relationship between a person and a thing.

  9. Ownership • The right to use, enjoy the benefits, and dispose of a tangible or intangible thing. • The right to exclude others from using that thing without authorization.

  10. Private Property • “Private property is arguably the single most important institution of social and economic integration.” • - Richard Pipes, quoted in De Soto, The Mystery of Capital. • “Property rights are social constructions determined by power relationships within the society.” • --quoted in J. Thome

  11. Economic and Social Functions of Property and Property Law • A dispute settlement mechanism. • Protects and fosters transactions and investments in things. • Defines persons’ rights and responsibilities. • Fixes the economic potential of assets. • Allows transactions between strangers. • Makes assets fungible and divisible into various usable economic states.

  12. Contracts • An agreement between two or more persons that creates, modifies or destroys a legal relationship. • A contract validly entered into is binding on the parties and can only be modified or terminated in accordance with its terms, by agreement or otherwise by law. (Pacta sunt servanda)

  13. Function of a Contract • To allocate risks and rewards in transactions.

  14. The Corporation • “The most important organization in the world is the company: the basis of the prosperity of the west and the best hope for the future of the rest of the world.” - Micklethwait and Wooldridge, The Company (2003)

  15. Corporation (Company) • Separate legal entity from shareholders. • Limited liability of shareholders. • Transferability of shares. • Centralized management structure. • Perpetual life.

  16. The Corporate Governance Problem is Caused by: • The separation of ownership and control in the corporation. • The principal-agent problem in the corporation.

  17. Bad Corporate Governance: • 1. injures investors • 2. damages markets. • 3. fosters inefficient use of resources..

  18. Regulation • A rule or order by a competent authority governing the actions of persons or organizations subject to its authority.

  19. The Methods of Regulation • Rule making • Required filings. • Inspections. • Granting permission. • Licensing. • Civil suits/injunctions • Criminal Prosecutions. • Other?

  20. Factors Influencing Regulatory Systems • Cost • Available human resources. • Institutions • Ideology. • Private and political interests • Corruption • Impact on the economy.

  21. Elements of the Rule of Law • Legitimacy of the law maker. • Pre-existing law/Non-retroactive • Equality of Application. • Legal supremacy. • Efficacy. • Stability • Independent, impartial judiciary. • Transparency • Accountability.

  22. Law and Politics • Law is not “a brooding omnipresence in the sky.” ( Holmes) • Laws are the result of a political process • Law are sustained by political support.

  23. Developing Political Support for Law Requires: • Leadership • Satisfaction of individual and community interests • Transparency • Public participation

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