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Kenneth Dam has made a proposition that the law and institutions matter in relation to economic development. This particular issue requires additional analysis and consideration. High economic development in the country is impossible without a strict legal basis. Each economic action must be grounded on particular legal and government statutes. The main idea Dam supports in the book and wants to argue is that country’s economic development directly depends on institutions it has. Moreover, its wealth depends on legal and administrative organizations since they can regulate the basic processes in society, which will push country’s economic development. One of the arguments in favor of this dependence is that in case the legal structure and institutions fail, the trust to such countries is lost, which leads to the economic damage. To guarantee strong and effective economic development, business and any financial structures should successfully cooperate with the government and its institutions.
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According to Dam, only successful implementation of the legal system in the country and effective distribution of responsibilities among institutions can create supportive circumstances for economic development. One of the best examples offered in the book by Kenneth Dam is Chinese economic development, which appeared to be successful only after policymakers had introduced an effective plan for country development, which touched the properly rights, equity and debt. For many years, China had been a closed country with low economic development and very few financial relations. However, when the situation had changed, the country showed very fast and rapid development of society, which was implemented along with successful economic conditions. Nowadays, the Chinese currency may be even included in the IMF SDR basket, which is very strong support for country development. However, such apid growth and intensive development of the economy in the country became possible due to very severe and radical changes, which took place in the legal system and other state institutions. Chinese development is one of the examples when the rule-of-law works and how it should work in order to implement fast changes in society making a weak economic country a giant in the modern world financial system.
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Equity and credit markets can develop successfully and receive revenue only if state institutions function adequately. Moreover, the problem of the banking system and its development has a crucial impact on the financial development of the country. Answering the question why there are wealthy and poor countries, the author of the book states that rich states have developed a strong legal background, and all financial operations are based on it. It is impossible to implement a successful credit system in society without the introduction of some effective laws, which regulate the relationships between banks and people. Another reason, which influences the financial development of the state, as well as human and bank relationships in particular, is trust. To give their money to banks, people should trust them. Only support from the judicial system and regulations from state institutions, which guarantee the credibility of the banking system in society, can ensure this trust. It is what can be a starting point for the economic development of the country. Speaking about poor countries, corporate bond markets remain undeveloped there, which is one of the reasons of low economic development in the region.
Searching for the relation between the economic development and legal institutions, Dam touches upon the issue of uncertainty. Many developing countries still have some uncertainty in their legal system, where many faults are found. The latter influence economic devvelopment since the whole financial system in the state is based on the law and policies. The absence of a strict legal basis gives some ways for law interpretation and changes within the country. It is not favorable for economic development. When society has some uncertain laws, the interpretation of these laws does not benefit people. Thus, it is impossible to talk about any economic development when only some limited layers of the population receive benefits and income. However, when society has strong support from institutions and the law, there is no opportunity to interpret the system in different ways, only one law for all works, and it is one of the reasons for developing strong economic society.
Trying to explain what is meant in the book by Dam, a very simple but illustrative example can be offered. When two sides start their relationships, they need to have some strong foundation for their operations. Only a strong legal foundation can help two parties develop successful and mutually beneficial relations. The book under consideration also mentions the geographic location and social factors as ones, which can influence economic development. However, in modern conditions of globalization and changes, each of these factors plays some particular role, but it is not so important as institutions and the legal basis.
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Therefore, the role of institutions and the law cannot be underestimated when it turns to economic development. To be successful, a country should implement a strict and effective legal framework to give the economy an opportunity to flourish. Chinese economic development has been chosen as one of the best examples of rapid growth of the state under the implementation of the rule-of-law approach. None economy can develop without legal support, and one of the basic roles of law and institutions in the state economy is to support and guarantee trust.
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