Why the Rule of Law Matters for Private Sector Growth in Asia and the Pacific

Modern commercial laws, effective dispute resolution, and consistent cross-border rules help businesses expand, integrate into global markets, and invest with confidence.

Across Asia and the Pacific, developing countries are turning to the private sector to drive job creation, innovation and transition toward greener and more resilient economies. But private sector-led growth depends fundamentally on the existence of a clear, predictable and enforceable rule of law environment.

Global data demonstrates that countries with a stronger rule of law foundation attract more investment, command lower risk premiums, and enjoy more stable long-term growth. Investors closely watch rule of law indicators when deciding where to put their capital, and credit rating agencies factor rule of law performance into their assessments directly affecting cost of borrowing.

For developing countries in Asia and the Pacific, strengthening the rule of law is no longer a “governance extra”, it is a core economic strategy. Foreign and domestic investors are far more likely to enter new markets, expand operations and integrate into global value chains when they are confident that contracts will be honored, property rights protected, and disputes resolved impartially and efficiently.

Yet in many countries, investors still face uncertainty – from contract enforcement and secured lending and collateral arrangements to insolvency and restructuring processes that lag behind the needs of a modern economy. Legal frameworks often do not support micro, small and medium-sized businesses, which form the backbone of national economies.

These enterprises represent over 95% of all companies, employ 60% of the workforce, and generate roughly 40% of economic outputs in Asia and the Pacific. But many struggle to formalize, access finance and participate in regional and global markets.

Modern legal frameworks can change this. Company laws must make it faster and cheaper for small businesses to register and operate a business. Secured transactions frameworks should move beyond reliance on land by allowing movable assets such as equipment, inventory, and receivables to serve as collateral, unlocking new financing opportunities for thousands of these enterprises.

Insolvency regimes should be streamlined, affordable and equipped to restructure viable businesses, with cross‑border provisions that reflect today’s interconnected markets. And with an estimated $1 trillion lost annually to unresolved low‑value commercial disputes, expanding online dispute resolution mechanisms can provide fast, affordable pathways for businesses to grow with confidence.

Mobilizing private capital is also essential to closing the enormous financing gap for low-carbon and environmentally friendly development. Beyond fundamental commercial laws, countries need new legal frameworks to participate in emerging environmental markets, especially carbon markets.

Many countries in Asia and the Pacific still lack clear rules for developing carbon‑crediting projects, applying social and environmental safeguards, and ensuring robust monitoring and enforcement mechanisms. Carbon rights and the legal status of verified carbon credits are also undefined in many jurisdictions. Without a clear and comprehensive legal framework, market participants lack investment certainty and high-integrity carbon credits.

To attract private finance for the conservation and sustainable management of nature, legal frameworks must enable finance mechanisms such as green banks, forest funds, payments for ecosystem services and biodiversity credits. Natural capital accounting and nature-related risk disclosures are equally important to inform investment decisions and guide financial institutions and investors.

Effective dispute resolution is essential for a strong private sector. Businesses invest and expand when they trust that disputes will be resolved fairly, quickly, and cost-effectively and that outcomes will be enforceable.

Across Asia and the Pacific, alternative dispute resolution – essentially resolving disputes without going to court – has become indispensable, reducing pressure on overburdened courts while providing commercial expertise. International arbitration is growing but many countries still need stronger legislation aligned with global standards and enhanced judicial capacity to enforce foreign arbitral awards. With the Singapore Convention on Mediation now in force, countries have an opportunity to integrate international mediation.

As countries adopt dispute resolution frameworks, avoiding legal fragmentation is critical. Consistent implementation of policies and standards strengthen predictability in cross‑border transactions, deepens regional integration, and boosts investor confidence – especially in a period of global uncertainty.

Strong rule of law systems are fundamental to private sector-driven development. They reduce risk, strengthen trust and improve the overall investment climate. As countries in Asia and the Pacific look to attract private investment and support long-term growth, strengthening fair and reliable legal systems can yield significant returns.

ADB’s Law and Policy Reform Program helps countries build the foundations for the rule of law needed for private sector-driven growth. The program supports policy dialogue, legal diagnostics, legislative drafting and capacity building for policymakers, judges, lawyers, and the private sector.

This article was originally published on Asian Development Blog.