The strength of sovereign institutions
is vital for attracting and maintaining foreign and domestic capital
alike. Fragile institutions coupled with faulty fundamentals present
a recipe for volatile growth or excessively deep recessions.
Well before the most recent crisis,
Larry Summers highlighted three factors imperative for economic growth.
They include a nation’s ability to:
“integrate with the global
economy through trade and investment,”
government finances and sound money,” and
“put in place an institutional
environment in which contracts can be enforced and property rights can
Sound macro management and trade policy
largely accounts for the first two factors cited by Summers. Although
complex, many mechanisms exist to assess macro fundamentals.
The power of institutions and the rule
of law are more complex to evaluate.
However, the World Economic Forum’s Global Competitiveness Index (GCI)2
provides rich detail on 12 “pillars” of competitiveness ranging
from institutions to health to innovation, etc.
Although the overall GCI index is of interest, details from the survey
provide a powerful glimpse into specific structural areas within a nation.
We delve deeper into the many GCI components
to create our own country indicator of the power of the
“Rule of Law” or RLI (see chart on right).
Although education, health, technological readiness, innovation, etc.
are critical for individual investments, a more circumscribed evaluation
of the rule of law is vital.
As the concept is difficult to measure,
we welcome feedback from legal or policy experts.
CFS Rule of Law Index (RLI) Ranks
Table shows ranks out of 142 countries. Smaller numbers represent high ranks and low risk.
3Average Rank of Five Components (RLI) Unweighted average of five components. (CFS)
41.01 Property rights How would you rate the protection of property rights, including financial assets, in your country? [1 = very weak; 7 = very strong] | 2010–11 weighted average. The Global Competitiveness Report 2011-2012
51.09 Burden of government regulation How burdensome is it for businesses in your country to comply with governmental administrative requirements (e.g., permits, regulations, reporting)? [1 = extremely burdensome; 7 = not burdensome at all] | 2010–11 weighted average. The Global Competitiveness Report 2011-2012
61.10 Efficiency of legal framework in settling disputes How efficient is the legal framework in your country for private businesses in settling disputes? [1 = extremely inefficient; 7 = highly efficient] | 2010–11 weighted average. The Global Competitiveness Report 2011-2012
71.19 Efficacy of corporate boards How would you characterize corporate governance by investors and boards of directors in your country? [1 = management has little accountability to investors and boards; 7 = investors and boards exert strong supervision of management decisions] | 2010–11 weighted average. The Global Competitiveness Report 2011-2012
81.21 Strength of investor protection Strength of Investor Protection Index on a 0–10 (best) scale | 2010 SOURCE: World Bank/International Finance Corporation, Doing Business 2011: Making a Difference for Entrepreneurs See section starting page 120
Analysis of the Components of the RLI Index The order of the countries in each chart is the same for comparison purposes and reflects their Rule of Law Index (RLI) rank. Small numbers reflect a high rank (low risk).
How would you rate the protection of property rights, including financial assets, in your country?