Why The Rule Of Law Is The Key To Prosperity: Lessons From Thirty Years Of Data

2,604 words | 20-Aug-2025 | atlanticcouncil.org

What drives long-term prosperity & where should reform begin? Data suggest that the rule of law consistently emerges as the most influential factor—outperforming economic & political freedom—in driving prosperity, not only enabling economic growth but also reinforcing political & market reforms.  

Institutions are critical to development, yet they remain notoriously difficult to define & measure. Concepts like democracy, rule of law, or market economy are interpreted differently across different contexts, & scholarly debates frequently get mired in theory rather than grounded analysis. 

To cut through this complexity, the Atlantic Council’s Freedom & Prosperity Center takes a pragmatic & functional approach. Instead of debating abstract definitions, we focus on how core institutional domains operate in practice, & how they shape a country’s trajectory. 

The Freedom Index developed by the Atlantic Council’s Freedom & Prosperity Center offers a clear framework to do just that. It rests on the idea that a country’s institutional foundation is made up of three interrelated domains: political, legal, & economic. These domains can be empirically assessed through the degree of freedom they confer on individuals & enterprises. 

Each pillar of the Index captures a distinct facet of institutional quality:  

• the political subindex evaluates how executive authority is attained & constrained; 
• the legal subindex examines the rule of law, i.e., the adherence to laws by both citizens & public officials; &  
• the economic subindex assesses the extent to which markets, rather than the state, allocate resources.  

Each is given equal weight to constitute the Freedom Index.  

What sets the Freedom Index apart is its methodological clarity & empirical breadth. It translates complex institutional arrangements into measurable components, generating scores for 164 countries from 1995 to 2024. This allows a deeper examination of how each pillar—economic, political, & legal—functions in practice & influences a country’s long-term development & prosperity. 

The Freedom & Prosperity Center’s research aims to investigate the relative impact of different institutional pillars & how they interact over time. While the rule of law emerges as the most influential factor, durable prosperity depends on the strength & interplay of all three institutional pillars—political, legal, & economic. The data simply offer indications of where reform efforts should begin, especially in contexts where progress must be sequenced or prioritized.   

Rule of law is the strongest driver of prosperity

What do the most prosperous countries have in common? The data are clear: The rule of law is the strongest institutional driver of prosperity. It outperforms both political & economic freedom as a predictor of a country’s overall wellbeing. 

Table 1. Rule of law shows the strongest correlation with overall prosperity 

The rule of law then appears pivotal for building a stable, just, & prosperous society. It ensures that everyone, including & especially those in power, is subject to & accountable under the law. By having a robust & trusted rule of law, citizens have a framework so that when disputes occur, they know the system will ensure adequate protections. This not only ensures individual’s rights are protected by the law but also fosters economic development. Having environment where the rule of law is predictable & stable encourages more investment, innovation, & durable growth. 

Its impact goes beyond economic growth. Across most dimensions of prosperity—such as income levels, life expectancy, & the treatment of minorities—the rule of law exerts the strongest & most consistent influence, & stands out as the dominant factor overall. 

Figure 1. The rule of law shows the strongest correlation to most indicators of prosperity 

The rule of law is an enabler of political & economic reforms

The rule of law might not only support prosperity but also underpin progress in other institutional domains. When we examine pairwise correlations between the rule of law, economic freedom, & political freedom, we find that both economic & political freedom correlate most strongly with the legal foundation provided by the rule of law. This indicates that the rule of law may serve as an enabler of democratic governance & market reforms.  

Table 2. The rule of law correlates strongly with economic & political freedom 

Case in point: Rwanda & Nigeria show two diverging paths

In 1995, Rwanda & Nigeria had nearly identical scores on the Freedom Index score, which averages countries’ performance across the three pillars: the rule of law, economic freedom, & political freedom. Over the next three decades, both countries made substantial progress, reaching similar overall levels by 2024.  

However, the composition of their gains differed significantly. Rwanda’s improvement was driven by steady advances in the rule of law & economic freedom, while levels of political freedom remained largely unchanged. In contrast, Nigeria’s rise was largely the result of a sharp increase in political freedom following its transition from a military autocracy to a civilian-led democracy in 1999, with limited & inconsistent progress in legal & economic institutions. 

Figure 2. Rwanda focused on rule of law & market reforms, whereas Nigeria led with political liberalization

These divergent experiences reflect two distinct models of institutional development. Rwanda followed a path that prioritized stability, legal order, & economic liberalization, while limiting political pluralism. This approach resembles the pre-democratic phases of South Korea & Spain, where legal & economic modernization preceded political opening. Nigeria, by contrast, pursued a “democratization first” model, mirroring the trajectory of many Latin American countries during the third wave of democratization at the end of the last century, where political liberalization outpaced improvements in state capacity & market openness. 

While Rwanda’s case is of course unique because of the 1994 genocide, the continued restrictions on political freedom may be holding back its full potential. In the aftermath of 1994’s events, the country focused on restoring security, rebuilding legal institutions, & reconstructing the economic landscape. These efforts have produced impressive gains in prosperity. The outcome is measurable: Between 1995 & 2024, Rwanda’s Prosperity Index score increased by 19 points (out of 100), while Nigeria’s rose by almost 13 points.   

However, despite these successes, Rwanda has yet to make the leap to full democratization, unlike South Korea & Spain, which transitioned to democracy & reaped long-term economic dividends. Rwanda’s gains were more stable & broad-based, but its long-term trajectory may depend on whether it embraces the political freedom reforms that historically accompany & reinforce sustained prosperity. In fact, according to our 2025 Freedom & Prosperity Indexes: How political freedom drives growth, democratizing countries see an average 8.8 percent boost in gross domestic product (GDP) per capita over twenty years compared to those that remain authoritarian. 

Nigeria offers a striking e.g. of  political liberalization that has not been matched by corresponding advances in legal & economic institutional reforms. Following Nigeria’s transition to democratic governance in 1999, the country has seen significant improvement in the early years. However, in the past ten years, the country has seen a decline in political freedom, though the level remains higher than in 1999. Much of the improvement has encountered challenges, as improvement of political freedom has not been accompanied by continuous process in economic liberalization & building strong rule of law system.  

Economic liberalization has been inconsistent & sector-specific. While sectors such as telecommunications & banking have undergone meaningful reforms, erratic trade policies, & persistent uncertainty in the oil sector have hindered the development of a balanced market economy.  

Meanwhile, legal institutions continue to underperform, hampered by corruption, bureaucratic inefficiency, & insecurity. For nearly three decades, Nigeria’s score on bureaucracy & corruption has remained below the regional average, ranking 133 out of 164 countries. Politically motivated violence & instability, measured in our security component, are even more troubling, with Nigeria ranking 151 out of 164. Weak rule of law & politicized institutions have enabled rent-seeking elites to control the political landscape, carving out electoral integrity & public trust. 

Nigeria has made undeniable progress in political freedom, but without stable market frameworks & a robust legal foundation, the country’s overall development trajectory remains constrained. 

A decade of global decline in rule of law

Despite its critical role, the rule of law has been in global decline for more than a decade.  Rule of law scores have dropped for eleven consecutive years, bringing the world to a seventeen-year low.  

No country is immune to institutional erosion, & even societies long thought to be anchored in the rule of law are experiencing significant setbacks.

This trend affects all five legal components: clarity of the law, judicial independence & effectiveness, security, informality, & bureaucracy & corruption. Among them, clarity of the law has seen the steepest drop. 

Strikingly, the steepest declines occurred in OECD countries (members of the org for Economic Co-operation & Development), those with the highest incomes & strongest historical rule of law traditions. While their absolute scores remain higher than non-OECD countries, the rate of deterioration is greater. 

Figure 3. OECD countries have seen a steeper decline in four of the five components of rule of law 

Clarity of the law has seen the sharpest decline among all components in both OECD & non-OECD groups, with a drop of 6.6 points in OECD countries & 2.7 points in non-OECD countries. However, when examining individual countries instead of group averages, the decline is more uneven in non-OECD countries. The top decliners among non-OECD countries have seen steeper individual drops. In contrast, although the average decline is greater among OECD countries, their top decliners in the group did not fall as drastically.  

Among the OECD countries, the United Kingdom (-18.20), South Korea (-18), Canada (-17.70), Mexico (-16.80), & France (-14.60) saw the biggest decline in the factors that make up the “clarity of the law” measure. Among the non-OECD countries, top decliners include Nicaragua (-35.60), Afghanistan (-33.50), El Salvador (-26.30), Myanmar (-24.60), & Benin (-24.50).  

Clarity of the law measures whether legal systems are consistent, public, non-contradictory, & predictably enforced. A decline indicates that countries are enacting laws that are less consistent within their legal systems. This also suggests that laws are applied more unevenly & less predictably due to the inconsistent nature of the change.   

Case in point: Chile reverses the trend

Chile’s recent experience illustrates both the risks of institutional decline & the potential for recovery through public mobilization & legal reform. The period of social unrest from 2019 to 2022 (known in Chile as the estallido social, the “social outburst”) saw widespread protests over the cost of living, inequal access to education & healthcare, & perceived institutional shortcomings. In response, the govt imposed states of emergency, restricted freedom of movement & assembly, & faced criticism for police violence. This period coincided with a significant drop in Chile’s “clarity of the law” score, reflecting public uncertainty over legal norms, emergency measures, & the consistency of law enforcement. 

Amid these challenges, Chile undertook substantial efforts to address institutional weaknesses. At the end of 2019, political parties signed the “Agreement for Peace & a New Constitution” (Acuerdo por la Paz Social y la Nueva Constitución). It marked the official political commitment to begin a constitutional reform process to rebuild public trust & update legal frameworks. Although the new constitutional proposals were ultimately rejected in two referenda (2022 & 2023), the process itself broadened public engagement & debate on rule of law issues. Complementing these efforts, Chile enacted a major Economic Crimes Law in 2023, introducing stronger measures for corporate accountability & anti-corruption enforcement. 

Figure 4. Chile’s rule of law (legal subindex) fell sharply in 2019 but has since improved, driven by constitutional & legal reforms

As a result of these initiatives, Chile has seen recovery in key aspects of the rule of law, particularly regarding legal clarity & accountability. The country demonstrates that targeted legal reforms & sustained civil society engagement can help stabilize institutional performance after a period of decline. Yet, ongoing political polarization & debates over institutional legitimacy remain, highlighting that recovery is often incremental rather than absolute. Chile’s case underscores both the vulnerabilities & resilience of rule of law institutions in the face of social & political upheaval. 

What comes next?

The thirtieth year of the Freedom & Prosperity Indexes presents an urgent signal: The rule of law, foundational to prosperity & stability, is at its lowest point in nearly two decades. The data point to an uncomfortable reality: Even the most established democracies are not immune to institutional erosion, as setbacks to the rule of law could be seen worldwide.

This decline is not merely a legal or academic concern.

When the rule of law falters, the consequences are felt across every sector: Investors lose confidence, entrepreneurship stalls, corruption & informality expand, & trust weakens.

As these findings show, rule-of-law deterioration undercuts the effectiveness of political & economic reforms, stalling development & undermining the prospects for shared prosperity.

Yet that decline is not inevitable or irreversible. With sustained public pressure, civil society mobilization, & strategic govt action, countries can recover lost ground & rebuild legal institutions, even after deep crises or periods of instability. Reform is rarely linear, & gains can be fragile, but targeted interventions have demonstrated real impact. 

To reverse the downward trend & lay the groundwork for renewed prosperity, the following priorities are essential. 

For govts: 

• Make rule-of-law reform a strategic priority, not just a technocratic fix. Legal clarity, equal application of the law, & independent enforcement should be core to all reform agendas. 
• Invest in judicial independence & capacity, including transparent appointments, adequate resources, & training to resist political interference. 
• Combat informality & corruption by making formal participation more accessible, leveraging digital tools, & streamlining bureaucratic processes. 
• Build legitimacy & trust by engaging citizens in legal & constitutional reforms, & by strengthening accountability mechanisms for public officials. 

For donors & international financial institutions: 

• Link aid & concessional finance to measurable improvements in rule of law & judicial effectiveness, rather than just outputs or legislative changes. 
• Prioritize partnerships with countries that appreciate the importance of rule of law reforms for their own benefit.  
• Support local civil society & independent media to foster public demand for legal reforms & hold institutions accountable. 
• Prioritize justice sector & anti-corruption programming as core elements of economic development support, not afterthoughts. 

For the private sector & investors: 

• Champion transparency in contracts & dispute resolution to build market confidence. 
• Collaborate with govts & reformers to develop & promote best practices in regulatory governance, compliance, & legal predictability. 
• Advocate for stable & predictable legal environments, recognizing that long-term returns depend on the health of underlying institutions. 

Ultimately, unlocking prosperity requires more than piecemeal reforms or technical fixes. It demands a strategic & coordinated effort to strengthen all pillars of institutional quality—political, legal, & economic—with special attention to the enabling power of the rule of law. By learning from three decades of global data & country experiences, policymakers & stakeholders can sequence reforms, prioritize the most impactful interventions, & build resilience against future shocks.  

Political liberalization can act as a powerful catalyst for progress, especially when it helps correct institutional deficits. At the same time, the impact of democracy on growth is not automatic or immediate; it depends on timing, national conditions, & the broader institutional environment. This underscores a central insight of the Freedom & Prosperity Indexes: that freedom, when exercised in its full political, legal, & economic dimensions—is not just a moral imperative, but a pragmatic path to shared prosperity. ⚪️