13 February 2023

The Economic Fallout from Curtailing Judicial Independence

Why Tampering With Judicial Independence is an Economically Costly Strategy, in Israel and Elsewhere

A new Israeli right-of-center government, with an ideological make-up unprecedented in the country’s history, came to power in late 2022 determined to radically reshape policies across a broad political spectrum. One of its principal targets is Israel’s Supreme Court, whose wings it seeks to clip by overhauling the current judicial selection procedures and the power the court supposedly exercises to roll back the government’s diverse and multilevel initiatives.

The attempt to emasculate the Supreme Court has drawn widespread criticism and protest, both at home and abroad. An intriguing aspect of the situation has been the opposition expressed by business interests and economic experts, who are often and perhaps wrongly believed to attach an overwhelmingly high value to efficiency, commonly achieved in an institutional environment characterized by the absence of competing centers of political power. Perhaps the most visible manifestation of the concerns and fears emanating from this source has been the open letter to Prime Minister Benjamin Netanyahu signed by fifty-six prominent international economists, including eleven Nobel laureates, stating that judicial reform along the lines contemplated would set Israel on a course akin to that of Hungary and Poland.

As to be expected, the Prime Minister, once a champion of the idea of economic liberalization and revitalization, has poured scorn on such misgivings and warnings. According to him, “the truth is exactly the opposite. Our moves are to strengthen democracy in Israel [and] to strengthen Israel’s economy. They will return Israel to the legal status of most countries in the world, to the state it was before.”

The merits and demerits of this sweeping generalization cannot be determined through battles in the political trenches and punches and counterpunches delivered over media-based platforms. There is considerable scientific evidence shedding light on the relationship between judicial independence and economic performance. At the most basic level, it may be noted that the five countries boasting the highest degree of judicial independence and rule of law (Denmark, Norway, Finland, Sweden, and the Netherlands) are all affluent democracies whose citizens enjoy a very comfortable standard of living and commendable economic stability.

From a more rigorous methodological perspective, a number of think tanks provide judicial independence rankings and scores for a large number of countries and these may serve as a foundation for examining more precisely the relationship between this variable and economic performance. Interestingly, the World Economic Forum [WEF], in its Global Competitiveness Report, ranks Israel 18th in terms of judicial independence and assigns it a score of 76.8, in terms of this criterion, which falls below Finland’s 94.0, for example.

While Scandinavian countries outperform Israel by a comfortable margin, its rank and score are respectable, given that the WEF sample encompasses most of the world’s states. The United Kingdom and the United States, for instance, rank 26th and 25th, with sores of 69.5 and 70.4, respectively. Still, Israel is not the extreme outlier on the high side that the proponents of far-reaching judicial reform claim it to be. This is because of their failure, whether an error of omission or commission, to draw a clear distinction between de jure and de facto judicial independence. The point is that Israel’s judiciary obviously wields greater de jure than de facto powers, and it is the latter that matter more in practice.

There is ample empirical support for this assertion.  When it comes to economic growth and economic performance in general, the impact of judicial de facto powers substantially exceeds that of the de jure variant. Notably, relying on a cross-section of fifty-seven countries, Lars Feld and Stefan Voigt, have demonstrated that there is a statistically significant relationship between de facto judicial independence and economic growth. Since the ultimate goal of the new Israeli government is to confine the country’s judiciary to a straitjacket significantly reducing its actual rather than merely the nominal room for maneuver, this has ominous implications for Israel’s future prosperity.

It should be emphasized that the relevant empirical findings extend beyond the overall macro-level economic impact of the powers exercised by the courts. Kenneth Dam has illustrated that the positive effects may be observed at the micro-level in domains such as the functioning of the credit markets, dynamism displayed by both large and small firms, competitive nature of the space within which they operate, and their propensity to invest and take risks in pursuing productive opportunities.

Similar, and more extensively supported, conclusions have been drawn by World Bank researchers. Importantly, they have highlighted the various negative economic implications of shackling the judiciary. Again, this may be seen in the micro realm inhabited by firms operating across a wide range of markets, as well their customers.

Judicial independence or lack thereof makes a difference even in an authoritarian, rule-by-law (as distinct from rule-of-law) political setting such as that of China.  Empirical research conducted by Ernest Liu and his collaborators brings this phenomenon into sharp focus. They have convincingly showed that loosening controls over the judiciary at grassroots level leads to a decline in local protectionist practices and greater cross-regional economic integration. A more equitable, level-playing economic field emerges, allowing resourceful and versatile small firms to flourish and compete head-on with their larger and often more cumbersome and less nimble counterparts. This is conducive to economic growth, employment creation, innovation, and social well-being.

The economic fallout from curtailing judicial independence is not confronted by Israel alone. Between 2017 and 2021, there has a been a substantial deterioration in the autonomy enjoyed by the judiciary in as many as forty-five countries and the trend appears to be well-entrenched. This inevitably bodes ill for a global economy struggling to shake-off the severe strains induced by rapidly escalating international friction, multiplying reversals on the globalization front, and the lingering symptoms of Covid malaise.

Prime Minister Netanyahu’s opportunistic and self-serving dismissal of a weighty body of knowledge affirming the close positive relationship between judicial independence and national economic performance thus flies in the face of scientific truth and does disservice to his country and its people. To make matters worse, he indirectly but recklessly belittles a thorny issue that should loom large on the international policy agenda but is not accorded the careful attention that it merits.

SUGGESTED CITATION  Mushkat, Roda: The Economic Fallout from Curtailing Judicial Independence: Why Tampering With Judicial Independence is an Economically Costly Strategy, in Israel and Elsewhere, VerfBlog, 2023/2/13, https://verfassungsblog.de/the-economic-fallout-from-curtailing-judicial-independence/, DOI: 10.17176/20230213-233211-0.

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