It has long been evident, even to economists, that economic development involves much more than a country's adopting the appropriate growth-enhancing policies. A lively scholarly debate has developed over the role of institutions, including the legal system, on the course of development. Dam, a professor of law at the University of Chicago and formerly a high official in several U.S. administrations, here critically reviews that extensive literature and offers his own judgments on the role of the rule of law in development, especially in limiting predation by the ruler or the state. He emphasizes the importance of a truly independent judiciary that can enforce contracts, a regulatory system that effectively protects minority shareholders, and a regulatory and supervisory system that encourages banks, which extend the bulk of credit in developing countries, to operate according to commercial, rather than political, criteria. A final chapter examines China as a potential counterexample to the claim that successful development requires an effective rule of law. Since China still faces formidable challenges in moving from a poor to a middle-income country, the jury is still out.
