ECONOMIC EFFECTS OF PROPERTY RIGHTS AND THE LEGAL SYSTEM By:Fodson Foday Kamara The economic effects of secure property rights and a well-functioning legal system are clear. Since people are to a considerable degree self-interested, they tend to undertake hard work and investments only if they have a reasonable probability of enjoying the fruits of their efforts. Thus, if property rights are insecure for example, because of high crime rates or high rates of taxation or high chances of government expropriation people tend to work and invest little. The concept of high taxation can be extended from income taxes or other formal levies to include onerous government regulations and licensing requirements, as well as bribes required by corrupt officials. Vigorous business activity also benefits from a legal system that allows for contracts to be clearly specified and enforced. This contracting potential influences relations of businesses with suppliers, creditors, workers, and customers. For example, if the legal system does not enforce the repayment of loans, loans will be scarce, and many productive investments will remain unexploited. One way that businesses can react to poorly defined property rights is to reduce their levels of operations. However, another possibility, especially in response to high rates of taxation and oppressive regulations, is to move from the formal to the informal or black-market part of the economy. This informality may be better for the economy than a cessation of operations, but it does entail costs. Informal operation tends to be less efficient because businesses have to expend resources to conceal their activities. In addition, black-market participants typically lose access to useful government services, such as official enforcement of contracts. Another effect is that the government fails to raise much in taxes on black-market activities, and the amounts collected from legal enterprises must therefore rise to pay for a given level of public expenditures. The stress on property rights and the legal system does not yield unambiguous implications about the relation between economic performance and the size of the government. Some public actions, such as maintenance of internal and external security and enforcement of contracts, entail more government spending and tend to enhance economic activity. Others, such as burdensome regulations and overly generous transfer payments, hinder the economy.
Posted on: Sun, 07 Dec 2014 09:18:36 +0000
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