Published online by Cambridge University Press: 24 May 2010
Economic growth requires economic agents to believe that political, social, and economic conditions are such that they can expect a reasonable return from their investments in property and from the agreements they make with others. Where such beliefs exist, they can arise as a result of many different mechanisms. Property owners might view government as constrained by law within a democracy or believe that a particular autocratic government has an interest in not expropriating property. Promisees might have blind trust in their fellow citizens or know that the court system will make appropriate judgments in case of a breach of contract. Therefore, in exploring the determinants of a country's growth performance, it is critical to understand which mechanisms fostered expectations among property owners and among those making agreements.
The emphasis in the recent economics literature, echoed in the pronouncements of the World Bank and similar organizations, is on formal institutions or the rule of law as crucial in fostering the appropriate expectations (Hall and Jones, 1999; Acemoglu, Johnson, and Robinson, 2001;Rodrik, Subramanian, and Trebbi, 2004). Such emphasis follows an important line of thought in institutional economics dating back to Max Weber and carried forth by Douglass North (1990), which we call here the rights hypothesis (Clarke, 2003b). This holds that economic growth requires a legal order offering stable and predictable rights of property and contract.