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  • Writer's picturebrillopedia


Updated: Sep 22, 2021

Author: Avni Kritika, V year of B.A.,LL.B(Hons.) From Amity University, Lucknow Campus.


The matter of economic development has always been escorted the judicial reforms and the courts throughout and this has been a most dynamic subject to debate upon at this moment. The judicial system of India has shown a deeper understanding with the development of economic conditions in India in past few years and thus help in facilitate better policy formation for economic growth. It is frequently debated that law and economic policies are connected intricately as the policy decision of the government are enunciated in legal language and in this way, law has served as a noteworthy aid to policy decision makings.

There is a strong consensus that the courts have a responsibility to play in the development of economies as the enforcer of property rights. As a consequence, there has been substantial work studying how to create accountable and impartial court systems that will be approachable to public needs. However, it is not enough that courts be open and impartial–they must also be efficient and accurate to ensure secure property rights, reduce uncertainty, and promote investment. But there has been little empirical work exploring such issues, despite the possible tradeoffs between policies which increase openness and those which increase judicial human capital that might make judges more efficient and accurate.

In light to this, the researcher has tried to bring on how legal institutions and economic development are intertwined with each other. The evidences have also been highlighted where the economic reforms are accompanied by judicial reforms and thus, they are kept on same platform. The relations between these major arenas are discussed and the ground where courts come into the picture of economic developments and how it effects the policies in India.

The researcher has brought out suitable suggestions and way forward to this relationship that has acted as a catalyst in this developing world. Nonetheless, the judicial institutions have been a boon to this era by enhancing the economic status in India.

Keywords: judicial institutions, economic status, policy, development, economic reforms.


It is quite debatable that law and economic policies are connected with each other in such an intricate manner that an action of one affects the other. As many of the economic policies of the government are expressed in legal language so it is evident from one way that judicial intervention is there in making economic policies. The policies are in affect by the laws made by the judiciary through secondary as well as primary legislations.

Law in any manner has always been an important support to complete many economic policies that has developed the economies at large. In recent times as well, economic reforms were accompanied by legal reforms and they both sailed together. As a result, a substantial rule of law reform and judicial reform is in progress in various nations of the globe as a significant element of financial reforms behaviors. Now, subsequently questions are arising like why the relationship between economic policies and judicial system is so necessary? What is the role that courts have in the development of economic condition of a country? What is the rationale behind the court to give aid in the economic policies? The one perspective to answer these entire random questions is that the Constitution which is supreme law of the land has certain essential provisions that are able to directly or indirectly affect the formulation of economic policy in a country; for example like there are provisions related to governments expenditure, taxation etc. in Constitution that may affect the working of the government in economic policies and thus these might hold superfluous expenditures and in a way develop the economy.

There can be some provisions related to right to choose a profession according to one’s choice and this can also straightforwardly affect the economic decision of an individual at micro level and it can indirectly affect the national economic policy making at macro level.

The court is the third-party adjudication instrument that aids in cost reduction, transactional cost, or the court can be the reviewing body by default which can review the constitutionality of these policies formulations.

There is no meaning of any judicial decisions if it is not enforced effectively. The judiciary must be honest and sound for the efficient enforcement. Various people consider that some technical laws can be enforced by administrative means, although a rule of law, in the primary economic sense of protecting property and enforcing contracts, requires a judiciary to resolve disputes between private parties, and safeguard against the state itself perplex easier when the judiciary can sort out a argument raised by a private party against the state based on constitutional provisions or parliamentary legislation. One inference extensively approved upon, not just in the economic literature but also among lawyers as well as legal scholars, is that the judiciary is a fundamental factor in the rule of law and more largely in economic development. An efficient, competent, open, and sound judiciary is crucial for economic development. In other words, with a bad judicial coordination, economic development will be sluggish or non-existent.

On the other hand, whichever study is done connecting to the relation amongst courts and economic development it is burdened with plenty of inherent complexities; from balancing the constitution and the economy to harmonizing the both. As the constitution is formed to maintain the economic conditions growing and developing with constant change and evolution. Therefore, in this context the role of court have a majority part to play in enhancing the economic development of a country.

A lot of studies be evidence for the positive benefits of strong effective judiciaries. The degree of honesty in the judiciary is correlated positively with economic growth. Better performing courts have been shown to lead to more developed credit markets.

A stronger judiciary is associated with the more rapid growth of small firms as well as the formation of larger firms in the economy. Other studies have shown that countries with competent courts affect comparative economic competitiveness.

An ineffective judiciary may have extraordinary and far-reaching effects on a country. It is a system that allows debtors of all kinds to escape at will, realizing that no one but the most determined of creditors will pursue them through the courts. It forces banks to lend at astronomical rates of interest because they cannot foreclose on debts. More worryingly, it means that vital infrastructure projects are stalled because investors cannot be sure the judiciary will uphold their rights. Lawyers in developed countries can point to numerous shortcomings in their own country. Yet judiciaries in developing countries frequently fall far short of standards for legal institutions in developed countries.

We believe that the rule of law is in effect when meaningful and enforceable laws assure transparency, fairness, and predictability in decisions; when contracts are enforced to promote business and commerce; when basic security and an independent judiciary protect personal safety and property; and when the people have access to justice. If we have these elements, the state can regulate the economy and empower private individuals to contribute to economic development by confidently engaging in business, investments, and other transactions. This, in turn, fosters domestic and foreign investment, creates jobs, and reduces poverty.

The Great Recession of 2008 provides an excellent example for considering the role of courts in the economy because, in truth, private law does have an effect beyond the affected parties. Businesses react to contract and tort cases. They often invest or not, innovate or not, based in part on how courts will treat them when deals go south or products fail. In the modern regulatory state, the law is completely interwoven with the economy, and business regulation has grown beyond merely settling disputes between feuding merchants, although settling contract disputes is still a core judicial function.

All this raises the question, “What can courts do to aid job creation and retention?” They can do three things without overstepping their limited role in popular governance. First, courts must aspire to treat similar cases comparably by using clear and predictable rules in tort and contract law. Second, courts must be impartial and treat all litigants alike whether they are corporations or individuals. Third, the judiciary must strive to resolve disputes quickly and without undue expense. These are respectable principles for approaching all sorts of litigation involving any citizens, but they impact economic enterprises in ways that affect all of us. It is no secret that companies will hesitate to innovate in the face of uncertain liability. Innovation is what drives economic growth and, thus, drives job creation. When companies are unsure of the outcome, when a deal sours, or when companies fear uncertain liability in tort, they are less likely to consummate some deals and more likely to keep some new products from the market.

If a country has a weak bureaucracy and legislature, the judiciary resorts to activism and usurps the role of both to the detriment of the economic and social structure. Most judges have a legal background with no training in economics and business. Therefore, when the judiciary usurps the power of other branches of the government, social and economic problems arise. Such a misstep stymies economic growth and hinders the normal operations of the executive and legislature branches, causing a tremendous cost to the society in terms of inefficiency, delay, and wrong decisions. Further, the judiciary is the unelected branch of government, answerable to no one and can make decisions that can cause lasting damage to society.

Law serves economic policy not only by guaranteeing and protecting these basic values in society but also by holding all the organs of the government accountable to a system of law. In this broader sense there is supremacy of law and the value of law and the judicial system is beyond the instrumental notion of law and needs to be upheld for its own purposes.


There are different approaches to understand the relationship between courts and economic development. The first approach is the instrumental approach and the second approach is the intrinsic approach. As per the first approach the judicial and legal systems have instrumental character in the formulation of economic policies. Subsequently as law has an enabling role in protecting the property rights and even enforces the contracts. Henceforth, it is one of the numerous challenging values that the society wants to accomplish.

Law, courts and economic policies have an instrumental relationship with each other. Law acts as an instrument to convey any policy resolutions including economic policy decisions. One of the most important examples of this approach is the function of law as well as judiciary in safeguarding property rights, which lessens the operational expenses. Safeguarding the property rights is a bare minimum prerequisite for the market financial system. It is often said that successful efforts to reform have to get the prices right as well as the property rights right.

There is increasing agreement about the theory with the purpose of getting the prices precise is essential however not an adequate situation for flourishing development. Hence the property rights are important equivalently. With the increment in liberalization and trade the demand for the safeguarding the property rights has increased. In the non-existence of state funded contract enforcement mechanisms there is no assurance that the property rights are secure and is in safe hands there is high possibilities that the state can confiscate, if the state is too strong.

With the exception of the state convincingly obligate not to confiscate, then risks underneath a strong state will be advanced, lowering the encouragement to invest. For that reason, advancement of free markets must be accompanied by various trustworthy limitations on the state's capability to influence economic regulations to the improvement of itself and its constituents.

As state is presumed to have the monopoly in coercive power, it is very much important that the judiciary should adequately be self-regulating as much as necessary to make sure that the state does not follow any confiscating tendencies of itself. At the same time as the judicial structure of the country defines the property rights as well as guarantees it, the judiciary acts as an independent intermediary enforcement mechanism to guard parties against the violation of agreement, and guarantees that the property rights so guaranteed are not taken away unlawfully. Over and above all these, safeguarding the property rights in judicial system with a well operating judiciary furthermore decreases the transaction cost, which is moreover important for the market to function. There has been a transformed prominence on the inter-relationship involving rule of law, economic development, and self-regulating judiciary as a result of the involvement of the institutional economists to the general understanding of economic efficiency.

Extensive research by the institutional economists has shown that, one has to move beyond the theory of ‘invisible hand’ to a choice of institution, which determines efficiency of the economic system. Institutions reduce transaction costs involved in any contract. The price of information together with defectively safeguarded property right makes it intricate to indicate and implement contracts. This amplifies the operational cost. Consequently, societies by way of determinedly elevated operational costs will have a lesser amount of trade, smaller amount of firms, not as much of specialization, a reduced amount of investment, and inferior productivity. Douglas North observes that the absence of low cost means of enforcing contracts was "the most important source of both historical stagnation and contemporary underdevelopment in the Third World. It is the institutions that determine whether transaction costs would be low or high. Rule of law as well as a proficient judiciary helps to lessen the operational costs also brings in economic effectiveness.

Nevertheless, a strict judicial structure as well as a mislaid meaning of sovereignty of judiciary may hamper the economic effectiveness. In preference of being facilitative in character the judicial structure may possibly develop into too firm to be changed and may develop into less adjustable to the varying demands of the moment. As a result, advocates of an instrumental position support a facilitating judicial system in comparison with a compulsory classification of law. A facilitating judicial system shall chiefly put in effects the contracts among agents on the contrary to another role of law as a compulsory system, where in addition enforcing contracts, the judicial system also indicates the conditions of contract.

In such a system the court has to involve itself in pronouncing law as well as in implementing that to a specified set of data. Until now the interpretative procedure is concerned, the court could rely on textual as well as original analysis, whereby it can refer to the text of the law that is applicable in a given case or can look into the intention of the framers of the Constitution or the statute concerned.

The second approach is more complex in comparison to the first approach as it brings out the relationship between judicial system, law and economic policies. This approach has a view that the economic reforms is reliant upon the judicial system particularly the Constitution and this is so because it is the supreme law of land and hence it provides protection to the rights of the people and any policy that is not in consonance with the fundamental norm will be void ab initio and hence it cannot come into force. Furthermore, law gives substantive validity to the provisions of the policy and even it validates the modus operandi of the implementation after that.

As a result, judicial system and economic developments are very well connected with each other. As per this approach, the legislative and executive pillars of government function inside an acknowledged structure containing of rules and the independent judiciary is assigned with the duty to protect, safeguard and uphold the law. Thus, this particular approach assigns a major position to the judicial system for the reason that in this system there is superiority and dominance of Constitution and it is the responsibility of the court to make sure that the provision in the Constitution is not violated. Given that in this manner it is to be pursued as a conclusion in itself.

On the contrary to the instrumentalist concept, the intrinsic concept views that the connection between law, judiciary and the economic policy is much deeper. Lessening of operational cost is only one of the outcomes that are developed from safeguarding the property rights as well as the protection of this right are only one of the procedures of this broad structure inside which the financial system operates.

The intrinsic model is premised on the principle that law authorizes and as a result legitimizes a policy resolution. Nonetheless, legitimization necessitates an approval of the fact that the law so prepared neither abridges any procedural requirements defined in any law or under the Constitution nor does it infringe any substantive rights or values enshrined in the Constitution. The judiciary is granted with the authority of judicial review to make certain that the supremacy of the Constitution is being upheld even while decisive and effectuating economic policy measures.

It results in legalizing or de-legalizing the acts of the other two organs with regard to a particular policy matter. In that sense it legitimizes the decision of the other two organs. Nonetheless, the authorization of the court would not have significance if the judiciary is dependent upon that organ for some reason or other. Thus, having an independent judiciary is to be expected to uphold rule of law which can operate as counteract to the majority and check on the actions of the additional two organs of the government in addition to it there must be enhancing welfare of people.

There are other points of view that an independent judiciary is also preferred by the legislature. William Landes and Richard Posner have come up with an economic model wherein the independent judiciary plays an important role in the operation of the political market for wealth transfers. They argue that the function of judges is to impart stability to the bargains struck between the legislature and organized interest groups. The stability enhancing role of the judiciary gives it more weight. Judiciary acts as a change agent and facilitates the evolution of the Constitutional principles and brings in necessary changes without any apparent amendment to the text of the Constitution and makes it relevant in changing circumstances. This minimally raises the query as to what should be the role of judiciary in general and whether the same standard is applicable in all cases including in matters where the Constitutionality of a policy is being challenged. The answer to this question can be attempted from institutional perspective where a positive analysis of adjudicatory role of court can bring to fore the factors that persuades as well as obstructs the progression of adjudication with reference to the other two organs of the state, as conventionally policy issues are measured to be outside the jurisdiction of judicial review.


The goal is to encourage the judicial, legislative and executive parts so that they can pay greater attention on the intrinsic transactions they are induced by the scarcity of resources. There should be importance made that the individuals are getting incentives properly with all the institutional objectives. There is a risk that any institutional reforms that emerges out to be the welfare improving when put in segregation may prove to have counterproductive effects if other institutional reforms are unattainable.

There more stress should be made on greater cooperation between policies and the communities making such policies. Changes in economic policies are already taking place although the institutional models of determining, monitoring and addressing issues arising from such policies still remain unchanged, which needs serious attention from policy makers.


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  • Henisz, Witold Jerzy. 1999. "The Institutions and Governance of Economic Reform: Theoretical Extensions and Applications." Public Management, 1:3, pp. 349-71. 4

  • Kumar, Krishna B., Raghuram G. Rajan, and Luigi Zingales. 1999. "What Determines Firm Size?" CRSP working papers 496, Center for Research in Security Prices, Graduate School of Business, University of Chicago

  • Coase, Ronald H. 1937. "The Nature of the Firm." Economics, 4: 16, pp. 386-405; Coase, Ronald H. 1992. "The Institutional Structure of Production." American Economic Review, 82:4, pp. 713-19. 7

  • Douglass C. North, Institutions, Institutional Change and Economic Performance, p. 3(1990)

  • Murphy,'Walter. 1964. Elements of Judicial Strategy. Chicago: University of Chicago Press. p. 1718, (1964)

  • Anderson, Gary M. 2001. "The Judiciary," in The Elgar Companion to Public Choice. William F. Shughart and Laura Razzolini eds. Cheltenham, UK: Edward Elgar.

  • Tumlir, Jan. 1984. "Economic Policy as Constitutional Problem." Fifteenth Wincott Memorial Lecture, Vol. 70. The Institute of Economic Affairs: London. See page 22


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