CAMBRIDGE – Brazilian President Dilma Rousseff’s visit last week to Washington, DC, offers an occasion to consider how some once-poor countries have broken out of poverty, as Brazil has. Development institutions like the World Bank have advocated improving business law as being essential to success. Are they right?
Such thinking goes back at least as far as Max Weber’s argument that an effective business environment requires a legal structure as predictable as a clock. Investors, it is thought, need clear rules and effective courts. Security of contract and strong mechanisms that protect investors are, in this view, foundational for finance, which in turn fuels economic growth. If a potential financier is unsure of being repaid, he or she will not invest, firms will not grow, and economic development will stall. Rules and institutions come first; real economic development follows.