What drives economic growth? This has been a dominant concern for senior global leaders for ages. Adam Smith in Wealth of Nations provided an answer much earlier, "Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice, in which the people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law..."

Economic growth has three primary determinants: physical capital growth, human capital growth, and technological innovation. If individuals are less confident their private property rights will be enforced, they are less likely to invest in physical capital (business facilities, manufacturing plants and equipment) since physical capital can be expropriated. This expropriation can be led by the state if the country does not have rule of law, or if the rule of law does not enforce respect for private property rights. If a country has rule of law but does not enforce respect for private property rights, then expropriation can occur in the form of looting by non-state individuals using physical force and threat of armed violence on the owners of the physical capital. [...]

We obtain GDP per capita from the International Monetary Fund, World Economic Outlook Database, October 2019. Data on Rule of Law are from The Worldwide Governance Indicators, 2019 Update. Rule of Law reflects perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. We obtained an alternate set of data on country governance variables from The PRS Group's International Country Risk Guide (ICRG). Their Law and Order index is focused on their assessment of the strength and impartiality of the legal system, and the popular observance of the law. The Law and Order index ranges from 0 (poor governance) to 6(good governance). We use the GINI index constructed by The World Bank to measure income inequality.

Some salient examples of how Law and Order and GDP per capita are related:

In 1990, India's GDP per capita ranked it at the 15.0 percentile compared to the GDP per capita of the other countries in the world; its Law and Order index was at 1. In the early nineties, India liberalized its international trade and deregulated its industries; by 2015 its Law and Order index was at 4.5, and its GDP per capita rank was at 26.1 percentile. A more relevant way of looking at the data is that from 1990 to 2015, several hundred million Indians went from abject poverty to a quasi-middle class standard of living.

China's case is even more dramatic: In 1984 its Law and Order index was at 3, and GDP per capita rank was at 3.3 percentile. After extensive adoption of free market policies, its Law and Order index was at 4.5 in 2006 and its GDP per capita rank was 31.3 percentile. Again, a more relevant way of looking at the data is that from 1984 to 2006, almost a billion Chinese went from subsistence living to quasi-middle class standard of living.

Argentina enjoyed a GDP per capita rank of 64.9 percentile and Law and Order index of 5 in 1999. Subsequently, with changes in their political regime, greater regulation and less free markets, their Law and Order index in 2017 stood at 2, and the GDP per capita rank at 57.1 percentile.

Venezuela enjoyed a GDP per capita rank of 62.6 percentile and Law and Order index of 4 in 1999. Subsequently, first under Chavez and then under his successor Maduro they nationalized major industries, and significantly increased government spending. As oil prices fell, they resorted to printing money. This led to hyperinflation. Venezuela imposed price controls which led to severe shortages and social unrest. In 2017, Venezuela's Law and Order index was 1 and its GDP per capita rank was 37.6 percentile. While Venezuela's decline in GDP per capita is significant, it should be viewed in light of the shattered lives of the tens of millions of Venezuelans during the past two decades.