A VISITING academic says that Cambodia must strengthen the rule of law, clarify property

rights, and develop an independent judiciary before it can hope to develop economically.

Dr Mancur Olson said that his argument had been proven around the world, both historically

and statistically.

Olson's "econometrics" conclusions differ from those who say economic development

is a precondition to the expansion of democracy. Most recently, Prime Minister Prince

Norodom Ranariddh has argued this opposite point of view - in the "rice before

democracy" debate.

Olson, from the University of Maryland, was speaking at a two hour lecture called

"Disorder, Cooperation and Development: A way of thinking about Cambodian Development."

It was sponsored by the Cambodian Institute for Cooperation and Peace (CICP) and

moderated by Finance Minister Keat Chhon, CICP's vice-chairman.

Olson and his colleagues have engaged in a study of prosperity, development and its

preconditions in more than 100 countries. He said they found that countries where

rule of law was most deeply entrenched, economic development was most advanced and

prosperity the greatest.

They also found the opposite.

Nations that suffered from a relative lack of rule of law; where property rights

were not clearly enough defined in law; and judicial independence not fully instituted,

were in turn less prosperous, and their economic development less well advanced.

"Cooperation is overwhelmingly the most important factor in explaining the economic

prosperity in the developed world," Olson said. An intricate web of cooperative

relationships girdles the globe, he said, in a "wide array of mutually beneficial

exchanges."

In under-developed countries exchanges were local, and the benefits of cooperation

could not be realized because third party enforcement of contracts was either non-existent,

arbitrary, corrupt, and/or unfair, he said.

In the developed West, governments act as the third party enforcers of contracts.

Where property rights were clear, the judiciary independent and there was rule of

law, entrepreneurs had more incentive to engage in "mutually beneficial exchanges,"

he said. Where such third party enforcement was only partial or absent, exchanges

tend to be local and most of the benefits of cooperation were not realized, Olson

said.

"Though every country, society, and political system has markets, only some

nations are able to achieve the highest levels of economic prosperity." Those

countries were the more democratic, he said.

Dr. Olson was asked whether the correlations he found constituted a causal relationship.

Khmer Institute of Democracy director Lao Mong Hay asked if causation was implied

- that the rule of law, for example, might promote development, or whether development

generally was a precondition for the institution of the rule of law.

Dr. Olson replied that studies indicated that there was a causal relationship, and

that the "causal arrow" indicated that institutional changes must precede

development. History of democratic institutional change and economic development

in Germany, Great Britain and the United States, and statistical studies indicated

this as correct, he said.

But, Olson, said, such a causal relationship did not rule out the possibility of

a "smart dictator," which he defined like a robber baron who stole from

his subjects at a predictable rate, 50 percent for example. Such a policy might allow

for economic prosperity to the degree that the benefits from individual initiative

and business transactions were not all taken by the state, and outweighed the costs

to those attempting to engage in business.

"But there have only been a small number of 'smart dictators,'" Olson said.

"Pinochet in Chile might have been one." But Olson warned that "typically

when a strong dictator dies, anarchy follows."

Peaceful succession had to be institutionalized, Olson said, and only democracies

that had institutionalized reasonably good governance on a multi-generational basis

were lasting democracies - and they were the most prosperous nations in the world.

Olson's study focused primarily on one measure for the institution of the rule of

law, the level of confidence in national judiciary systems and the clarity and stability

of property rights. The indicator for the strength of these democratic institutions

was the ratio of the amount of money people put in banks, time deposits, and financial

instruments and the total amount of currency available within a particular country.

"These kinds of money make sense with third party enforcement," Olson said.

Olson said that he found that where M2 was a relatively higher fraction of total

currency, national prosperity was greater.

He also found the reverse, where prosperity was the lowest, the money that citizens

were willing to place in banks was lower.

Olson said: "There is little [investment] capital in the Third World. Though

capital is scarce there, the huge amounts of capital available in the First World

have not moved there."

"The pattern of production and cooperation that is possible in the most prosperous

of nations is not possible in an environment where there is no third party enforcement

of contracts," Olson said.

In Third World countries, mutually beneficial economic exchanges tend to be local,

and self-enforcing.

Without predictability and well-defined rights to property, long distance trade,

specialized production, capital loans, and insurance are much less likely to be engaged

in or be available.

"How might "wide-ranging, wide-spread prosperity" be achieved,"

Olson asked.

First, open, non-projectionist economies. Second, impartiality. "The more transactions

within a nation are treated the same as transactions across its borders, the more

likely a nation is to be prosperous." Third, no centralized price setting. "With

set prices, some gains from trade are not realized. People and government must realize

that there are great benefits that can be had by allowing the market to set prices."

But most importantly, prosperity would follow the availability of third party enforcement

of contracts - by democracy, he said.

Dr Benny Widyono, Special Representative of the Secretary-General of the United Nations

in Cambodia, asked whether aid agencies might not enhance the prospects for an independent

judiciary in Cambodia by subsidizing budgets to pay higher salaries to judges.

Dr. Olson said that an important factor in achieving an independent judiciary was

ensuring that the jurists do not have a vested interest in the outcome of the trial.

"How can such a situation be created? Transparency," Olson said. "We

have to make sure that we give incentives to those who have a track record of impartiality."