Various institutions in the economy play a key role in determining the rate of economic growth and development. Among these institutions are the legal and judicial institutions and their role is very crucial for any economic development. The legal and judicial institutions interact with the economic growth and development through two different ways; primarily, economists assist lawyers and courts in general antidumping cases, anti-trust cases, and other types of foreign and international trade litigation. Secondly, economics is useful in understanding the motivation to litigate, the litigation process, and the costs involved.
An effective judiciary and legal system is helpful in stimulating economic growth and development by protecting intellectual property, which in turn fosters technological innovations, progress and absorption (Bourguignon & Pleskovic, 2007). This happens through two different way; one the less developed and developing countries with tough intellectual property legislation may opt to buy the intellectual rights from companies in developed countries since it is easier. Recent research shows that countries that protect their intellectual rights develop faster since they attract technologically advanced firms from the United States, the United Kingdom and German and Japan. Secondly, such companies foster development through encouraging domestic firms to invest in technology and motivate them to be innovative. As a result, such domestic investors are certain that there will be no exploitation of their intellectual properties.
Effective judicial and legal system ensures consistent and timely enforcement of private contracts, which in turn reduces transaction costs, which allows economic agents to widen and increase the number of their market transactions. It is obvious that when costs of enforcing contracts go down, more funds become available for investment thus fostering economic growth. In addition, this acts as a motivating factor to encourage foreign investments. In addition, this result in some spillover benefits like diffusion of knowledge in the market, advancements in technology, and transmission of sound financing, marketing and managing practices. All these are key components for economic development for any country. A well functioning judicial system gives the definition, protection of property rights, specifically private and intellectual rights, sets out the trading rules for those rights, defines rules for entrance into and exit from the market, and lastly it fosters competition and regulates behaviors in the markets where monopoly exists. (Elgstrom & Goran, 2002).
A malfunctioning judicial system is a hindrance to economic development since it stimulates inefficient use of technology and resources pushing countries away from their potential output. Large transaction risks and high risks push investors away as they do not want to waste time and resources resolving contract cases. Such firms are also not able to maximize production or benefit from economies of scale due to the legal limitations. In addition, such a system results in so many litigation, which have harmful effects on the economic development (Cabrillo & Fitzpatrick, 2008). This is because, such litigations consume so many resources both for the public sector like the judges and administrative personnel and the private sector like the lawyers, which would otherwise be used for developmental and economic activities. A system that produces very little litigation, on the other hand, would be an indication that people and investors do not trust that the system will protect their rights efficiently (Muhammadi, 2008). It could be an indication that the costs of sorting litigations in the judiciary are very high and this would discourage investment since litigations must occur in any market regardless of how well the laws and contracts are written.
The role of the judiciary and the legal systems in any economy are very important and without an effective system, any economy would suffer (Kermit & McGuire, 2005). Investors need assurance that their rights will be well protected, and the process will not escalate their costs of operations. An effective system acts as a stimulant for economic development while a malfunctioning system acts as a deterrent for the same.