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Abstract: Research surrounding political institutions and credible commitment to the rule of law is integral to recent efforts to tie democracy to economic development. I identify the determinants of rule-of-law perceptions in Latin America and argue that constraining elected officials facilitates a commitment to democracy that makes government policies credible. I also argue that aspects of politics leading to deadlock might have a hidden upside in generating policy credibility. I test my arguments against pooled cross-sectional, time series data for twenty Latin American countries between 1996 and 2012. Ultimately, my research demonstrates the benefits of functioning checks and balances among elected officials for the rule of law and provides a uniform framework linking democratic inputs to legal and economic outcomes.
Latin American countries have had difficulty committing to the rule of law. Scholars blame the (un)rule of law for low investment, slow economic growth, and stagnant or unequal political development (see Méndez O'Donnell; Pinheiro 1999; North and Weingast 1989; De Soto 2003; O'Donnell 2001; Mainwaring and Scully 2010; Diamond 1999; Foweraker and Krznaric 2002; Haggard, MacIntyre, and Tiede 2008; Haggard and Tiede 2011). From an economic standpoint, governments' abilities to commit credibly to policy regimes and the rule of law also allows governments to commit to protecting property rights, enforcing contracts, and treating firms and investors equitably under the law.1 Investors are justifiably reluctant to invest if a government cannot credibly guarantee that their investments will be safe from expropriation. Firms will not invest the extensive capital necessary to buy land or build a factory if they fear that the state will nationalize their investment once it becomes profitable (see Haber, Razo, and Maurer 2003; Hoff and Stiglitz 2002; North and Weingast 1989). Furthermore, investors will not keep their money in a given country if they fear that the government will tax profits at exorbitant rates. Investment capital therefore flows away from countries where profits are in jeopardy and toward countries where profits are safe from rapacious governments. Ultimately, markets fail to develop and growth suffers in countries where governments cannot make a credible commitment to uphold property rights and enforce contracts.
There is considerable discussion of what the rule of law means, and some scholars argue that the term is so amorphous and...