Sustained growth occurs through innovations in markets and organizations. Developing an innovative idea requires capital. Combining ideas and capital poses a problem of trust: the investor must trust the innovator not to steal his capital, and the innovator must trust the investor not to steal his ideas. Overcoming distrust between innovator and investor determines whether an economy grows and a country becomes rich, or an economy stagnates and a country remains poor. When property is secure from thieves, people will invest in the future. If contract law is ineffective, investors only trust family and friends to develop businesses. Finance is personal. When contract law is effective, contracts can provide sufficient trust for investors to choose business partners who are not friends or family. If corporate law is ineffective, however, investors must actively participate in the business to protect their interests. Finance is private. For passive investors to put their funds under the control of strangers, corporate law (or, more broadly, business law) must protect their interests. Finance is public. Thus three types of law underpin three types of finance: Property law underpins relational finance, contract law underpins private finance, and business law underpins public finance. Widening the scope of finance removes constraints on sustained growth. Most poor countries have good law on the books and bad law in practice. The main obstacle to sustained growth in poor countries today is ineffective civil and business law. Effective laws require reliable and timely sanctions for lawbreakers, which depend on state institutions and social norms.
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