Area V
Legal Structure and Property Rights

A. Legal Security of Private Ownership Rights (Risk of confiscation) (weight .345)

B. Viability of Contracts (Risk of contract repudiation by the government) (weight .339)

C Rule of Law: Legal Institutions, Including Access to a Nondiscriminatory Judiciary, (weight .317)
that Are Supportive of Rule of Law Principles

Property rights are crucial to the workings of a market economy and the protection of personal freedom. Without well-defined, secure, property rights, and the rule of law, both the efficiency of markets and the incentive for productive behaviour are severely eroded. More importantly, the absence of these factors undermines economic freedom.

How can the security of property rights and the presence of rule of law be measured? The International Country Risk Guide has tracked the political, financial, and economic risks accompanying business and investment activities in various countries since 1982. Their ratings are published monthly and marketed to businesses, investors, and financial analysts.

While the ratings cover several areas, three of them--risk of expropriation, risk of contact violation, and presence of rule of law--are particularly pertinent to legal structure. The risk of confiscation variable indicates the likelihood that one's property might be expropriated. The component for risk of contracts reflects the degree to which "foreign businesses, contractors, and consultants face the risk of a modification in a contract taking the form of repudiation, postponement, or scaling down." The rule of law variable "reflects the degree to which the citizens of a country are willing to accept the established institutions to make and implement laws and adjudicate disputes." Nations are given a higher score for the rule of law component when "sound political institutions, a strong courts system, and provisions for an orderly succession of power" are present. Lower scores indicate "a tradition of depending on physical force or illegal means to settle claims."

While these ratings involve subjective evaluations on the part of the panel of experts of the PRS Group, the publishers of the Guide, they reflect the views at the time the ratings were made. Their credibility is enhanced by the fact that business decision-makers are willing to pay for them and the rating service has survived in the marketplace for an extended period of time. To date, they appear to be the best available indicator for the soundness of legal structure and security of property over an extended time period.

The original data for Components V-A and V-B were already on a zero-to-10 scale. Component V-C was initially on a zero-to-six scale, which was converted to a zero-to-10 scale. The numbers above in parentheses e.g., (weight .345), represent the portion of the area rating that is determined by a specific component. These values were determined by principal component analysis. The ratings for this area are indicated graphically on the following page.

Area V Graphic: Legal Structure and Property Rights, 1997