This page deals with economics and business issues,concerning Latin America, and the global economy.-
Friday, April 27, 2012
Economics and the rule of Law
Most of the economics analysis of markets behavior , assumes a frictionless world without transaction cost . In the real world, there are transaction costs, the most important of them arising from legal requirements, because at the current technology level, perfect information is probably fully available, although it does not necessarily imply zero transaction cost because of different learning abilities.
Thus, what about the legal costs?. When it comes to either good or services exchange, or for this matter any kind of exchange, economics is all about transfers of property right . Markets are an instrument to do so, in more efficient way than public authorities. Exchange and capital accumulation, work while there is a well designed framework, which protect those property right .Those countries which walk away from this “rule of law condition”, hurts the core of capital and wealth accumulation. Nobody will dare to invest, where there is no protection for the benefit of that investment .The premise that those wealth loses ,can be recover by the action of the state has proved to be false. Corruption and mismanagement, replace the efficiency, and there is no way this substitution might be considered neutral.-
The Peruvian economist Hernando de Soto, has analyzed the correlation between the legal setting , business transaction and capital accumulation , concluding that those economies which work without such a proper legal setting , have significant wealth losses.
Therefore, the rule of law, is a necessary condition to support wealth creation. Those countries which have made its way through up to the developed status, have been guided by key principles and a legal framework to facilitate the capital accumulation. Latin America ,do not have a strong tradition of being driven by the rule of law. Most of its tradition, deals with the role of the State in the economy, and the influence of those who control it who have made of the law a caricature : the law is accepted , but is does not imply a compromise with it.
These days, we live in an interconnected global economy , with instantaneous mobility of financial resources, which walk away from those places with no legal framework. They compare transaction costs, and sure they will chose those places where those costs are the lowest. As long as Latin America need more private investment, it is not the time to move back to a situation which indicate to foreign investors they do not have a guarantee for the risks they assume by investing here to create more wealth.