This article was published in slightly different form in the October 1, 2007 issue of International Financial Law Review.

Despite recent volatility in the financial markets, the world is still experiencing the greatest economic expansion in history. Asia is poised to grow faster than any other area in the next decade, but will not reach its potential unless it reduces the growing number of infrastructure bottlenecks. Current infrastructure in Asia lags behind international standards in quantity and quality in key areas such as water, waste disposal, energy and transportation. According to recent estimates by the Asian Development Bank, between $380 billion and $450 billion is needed annually for the next few years — but less than a third of that is being committed.

The gap between the supply and demand for infrastructure is not caused by lack of money in Asia or elsewhere. It is due to the deficit in good governance, the lack of sound public institutions and the inability of the local governments and the private sector to work together effectively.

The long-term debt financing that is needed to underwrite infrastructure projects can be supplied through banks or bond issuances. Most countries in the region have bank-centric financial systems that unduly concentrate risk in a small group of financiers. Bond markets throughout the region need to be further developed so that risk can be more effectively diversified. This will require further development of disclosure standards, issuance rules and enforcement capacity.

Neither foreign nor domestic investors will part with their money for long periods of time unless they have confidence that it will be returned and that they will be adequately compensated for the risks. All too often, the legal system and the courts create risks by failing to provide the assurance that contracts will be honoured as written. Losing bidders can collude with judges who "sell" temporary restraining orders that stop work on projects on flimsy grounds. Even properly entered arbitration awards are ignored by local courts for specious public policy reasons. The judiciary needs to be professionalized from top to bottom.

While the laws and regulations governing bidding, construction and financing in many countries are perfectly fine as written, lax or inconsistent enforcement makes them meaningless. Worse yet, petty corruption breeds cynicism. Grand corruption unfairly taxes almost everyone and does not guarantee results. Both discourage new investors. While no country in the world is completely free from corruption, this malaise is just part of the system in far too many countries. The authorities will not get serious about reducing corruption until the public demands that they do so; and herein lies a seemingly intractable problem. Many countries are beset by poor democratic governance that militates against articulation of public demands.

In fact, some policymakers, while not saying so explicitly, take the view that modernization of the justice system can wait while priority is given to other sectors. For example, judicial system expenditures comprise a small portion of most governments' annual budgets. If legal reform is so important, one might ask why political leaders pay such little attention to it. Often the reason is a short-sighted view of law's benefit to a society. Viewed narrowly, the legal system is about conflict resolution. There is a tendency to think that only those individuals who are in conflict benefit from investments in the legal system. But the truth is that the law underlies and defines relations between citizens and the government and between the private sector and social institutions. And just like health and education, the rule of law is a public good.

Creating and implementing legal frameworks that promote the rule of law can lead to greater transparency, accountability, predictability and public participation in development — the very essence of good governance. Take the case of Bangladesh. Each year, there are over 500,000 criminal cases and 500,000 civil cases. But approximately 80% of both involve a dispute over rights to use land. The problem can be attacked by providing the courts with better information technology and case-flow management systems, but a better approach might be to focus on clarifying some of the basic legal issues concerning ownership, tenancy and inheritance.

The Philippines provides an unfortunate example of how legal challenges inhibit the rapid development of much-needed infrastructure. Examples are the Manila light rail system, the third passenger terminal at Ninoy Aquino International Airport and the North Rail project. Contractual disputes in large projects often have to be resolved by the Philippine Supreme Court because few have confidence in the ability of the lower courts' to decide cases competently or fairly.

Can countries develop in the absence of the rule of law? Those who maintain that developing the legal and judicial system is not crucial for economic development often cite the People's Republic of China as an example. The reality is that China has embarked upon major legal reform while experimenting with the development of a market economy. This includes new laws on companies, securities regulation, banking and administrative licensing. Importantly, China has acceded to the World Trade Organization and is earnestly implementing its requirements by changing over 2,000 laws and regulations.

Adequate financial flows into infrastructure can only be assured when a suitable environment is created so that more bankable projects (those that protect the reasonable expectations of investors) are allowed to emerge. Future investments in hard infrastructure must be accompanied by investments in the soft infrastructure that is afforded by institutions that ensure accountable, responsive and transparent economic decisions. A well functioning legal system can deliver predictability and fairness. In the long run, that is in everyone's best interest.