DOI:https://doi.org/10.65281/702392
Ferhati Fali
PhD Student, Faculty of Economic Sciences, University of Biskra
Email:Faliferhati97@gmail.com
Dr. Abderrahmane Refrafi,
Lecturer, Faculty of Law, Biskra
Email:(refrafi-abderrahmane@univ-eloued.dz)
Received: 02/01/2026 | Accepted: 30/03/2026 | Published: 08/04/2026
Abstract
This paper examines the relationship between law and economic development in Algeria through the analytical lens of new institutional economics. It critically revisits the theoretical foundations of the “Law and Development” movement and its limitations, particularly its reliance on institutional transplantation and its failure to account for local socio-legal contexts. The study argues that contemporary Algerian legal reforms reflect a shift toward a more institutionally grounded approach, where the rule of law, legal certainty, and judicial effectiveness are central to economic transformation.
Adopting a descriptive and analytical methodology, the paper explores how formal legal institutions—such as property rights protection, contract enforcement, and regulatory stability—interact with informal norms and socio-cultural dynamics to shape economic performance. It highlights the role of recent legislative and institutional reforms in Algeria, particularly those aimed at improving the investment climate, strengthening legal security, and promoting entrepreneurship within a diversified economic framework.
The findings suggest that while new institutional economics provides a more robust explanatory framework than earlier development models, it remains limited by its tendency to reduce legal systems to purely economic functions. The paper concludes that sustainable economic development in Algeria requires a multidimensional understanding of law that integrates economic efficiency with broader values such as justice, legitimacy, and social cohesion.
Keywords: law and development, new institutional economics, rule of law, economic development in algeria, legal institutions
Introduction
The field of “Law and Development” has long suffered from a lack of academic recognition, primarily due to its absence of a unified theoretical framework, the conflicting nature of its definitions, and the controversial institutional agendas it raises. Despite its existence for over four decades, it remains a vague and multidisciplinary field of study, often viewed as lacking the rigorous standards of related academic disciplines.
This research aims to address the essential elements for analyzing Algerian economic law from a critical perspective. This type of analysis, whether from an economic or legal viewpoint, allows for diverse insights within the Algerian legal framework. The effort can be directed towards studying the practical solutions offered by economic analysis to address specific legal issues.
Development theories have largely overlooked the vital role that the Algerian legal system can play in driving the development process and achieving its objectives. On the other hand, serious legal academic studies that have addressed this relationship have been limited to a restricted number of philosophical and socio-legal analyses.
After the “Law and Development” movement experienced a crisis in the early seventies [1], independent academic efforts emerged, led by researchers who sought to complete the discussion about the role of law in development. These efforts coincided with the emergence of interest in the relationship between law and development as a central topic in the mid-sixties. This research field gained increasing momentum thanks to the contributions of scholars from various development theories, economists, and social jurists. This integrated interest came with what was known as the “Law and Development Movement,” which the American government launched as part of its development aid strategies directed towards countries in Africa, Latin America, and Asia.
This orientation aimed to establish policies that rely on adapting legal systems, institutions, and legal institutions derived from developed countries as a means to enhance the paths of development and growth in developing countries [2]. This orientation highlighted the importance of establishing the rule of law as a fundamental condition for achieving economic development within the framework of market developments.
This research paper critically analyzes the role of the new institutional economics [3] in Algeria as a primary theoretical framework behind the contemporary interest in the relationship between economic development and law. We argue that this approach redefines the conditions of economic and legal analysis to overcome some of the limitations that contributed to the crisis of the “Law and Development Movement.”
The renewed and new “institutional economics” is not without its challenges, as its comprehensive and holistic understanding of institutions and the dynamics of the relationship between individuals and regulatory rules appears limited.
We adopted an analytical descriptive approach in addressing the topic from multiple perspectives, through analyzing and describing constitutional aspects, and socio-legal analysis to clarify how these principles can be integrated to enhance the role of the rule of law as a pivotal element in achieving sustainable economic development.
The Modern Algerian Legal System as a Tool for Economic and Social Progress
The academic and practical fields have witnessed the interconnectedness of law and economic development, reflecting a set of initiatives that emerged within the framework of what is known as the “Law and Development Movement.” This was part of a broader project aimed at democratization, a vision that received significant support in Algeria [4].
These initiatives aimed to strengthen the link between legal systems and the process of economic development through adopting measures that sought to create fundamental changes in economic and social conditions using legal tools.
Emphasis was placed on the pivotal role that legal systems play in the development process through two main functions: the first is manifested in providing the necessary legal framework for market operation, especially through protecting property rights. The second lies in embodying the goals of social and economic development, with a focus on achieving the interests of public law.
Legal rules have become future visions that reflect aspirations to shape a desired reality through setting programs aimed at achieving specific economic and social goals. In this context, the state, as a fundamental actor in the development process, adopted the legal system as a tool for achieving economic and social progress.
Through establishing legal security and protecting the two paths, a significant space has been created by these legislative reforms. For example, the penal code was reviewed in 2025 to include objective and precise criteria for defining and restricting acts of management that may violate laws, regulations, or security rules, and are punishable by law. Furthermore, this amendment to the law included provisions that severely punish and criminalize any act that hinders or infringes upon investment.
The way law is employed to support development is linked to several methods, including creating an institutional environment that facilitates private capital growth and integrates economic and social goals, driving the changes that the state seeks to achieve. This approach largely relies on theoretical foundations that formed a source of inspiration for this movement. The link between law and the accumulation of capital relies on the ideas of Max Weber, who made prominent contributions to his analysis of modern rational law as a key tool that contributed to the development of European capitalism.
Max Weber believed that modern rational law was a fundamental pillar for the emergence of capitalism, as it provided legal certainty and the ability to predict, which are necessary for complex economic processes. This legal system allowed for the commercialization of the economy, the guarantee of private property, and market freedom, which enabled institutions to accumulate capital and plan for the long term. Thus, law transformed from mere moral or ethical rules into a precise procedural tool that supported the expansion and stability of the European capitalist system.
Through his study, Weber attempted to understand the reasons that made the modern industrial system emerge specifically in Europe, unlike other regions that possessed similar or even greater commercial and economic capabilities. Weber focused on the unique characteristics that distinguished European society at that time and paved the way for capitalism, considering that the fundamental difference lay in its legal system [5].
This system was based on general, concise, and uninfluenced legal rules by inherited traditional values or religious pressures. Decisions were based on these rules, characterized by their rationality and universality, and the absence of continuous political interference, which made them more flexible and adaptable to changes.
Based on this, Weber argued that the European legal system enjoyed a high degree of rationality compared to the systems of other civilizations, which were often characterized by their complexity or subjection to external influences that limited their independence.
The “Law and Development Movement” concluded that developing countries should adopt rational, independent, and clear legal systems, especially in the economic field, which would improve the performance of local markets and create the wealth necessary for achieving sustainable development.
Confidence in the economic role played by legal institutions increased in Algeria as a result of the contributions made by modernization theory, which affirmed that legal systems constitute an essential tool for bringing about social change [6].
This process also includes building a national project that transcends divisions, whether social or ethnic, and establishing a democratic framework through which pluralism can be enhanced and an environment of political competition created. To achieve these transformations, education becomes a fundamental tool for raising awareness and preparing the population.
This integration between the legal and judicial fields, on the one hand, and the economic, investment, and entrepreneurial fields [7], on the other hand, along with the digital transformation accompanying all these reforms, does not express merely a technical choice, but rather a state project that seeks to build a strong, competitive, and productive economy, based on law and trust, which protects fair work, encourages economic growth, and freedom of initiative.
Within the framework of this vision, the need arose to establish legal institutions, as well as political ones, that are compatible with the requirements of social modernization. These institutions were often similar to what exists in developed countries, as they were considered an integral part of the path of modern development, a path that was believed to be inevitable and natural for achieving progress.
This integration between law and social modernization is also achieved through incorporating economic and social goals within the legal system, a principle inspired by the school of socio-legal jurisprudence and legal realism that originated in the United States.
The legal system recognizes social interests and works to protect them in response to the demands of individuals, groups, and various institutions. Therefore, law must be applied, interpreted, and managed in a way that ensures the achievement of these economic and social goals and interests it expresses. In this sense, law has become an effective tool for social reform, embodying the interests and priorities of society.
On the other hand, these theoretical insights, the concept of using the legal system as a means for social engineering, was consistent with the development model prevalent at that time. During that period, the state played a central and essential role in leading the national development process.
This role was manifested through its direct intervention in economic planning, expanding the scope of trust in state-owned companies and institutions as the axis of economic activity, in addition to monitoring and regulating the private sector and restricting economic relations with other countries. This is what is called “Economic Interventionism,” where the government plays a direct and central role in guiding economic activity.
This orientation reflects an economic model that relies on central planning, strengthening government institutions’ control, and tightening control over the private sector, along with adopting protectionist policies that limit external economic openness to ensure national sovereignty or achieve specific development goals [8].
In the shadow of these development policies, development goals were incorporated into the framework of public law, which led to a decline in the importance of private law in favor of the state’s increasing role in the economic process.
Law began to restrict private property and freedom of contract through a set of regulations and legislation that included the management of public companies, controlling prices, and organizing exchange operations. This legislative approach reflected a tendency towards strengthening the state’s roles as the main driver for development and social transformation [9].
Exhaustion and Crisis of the “Law and Development Movement”
The importance of the legal system as a tool for promoting development emerged through a set of diverse legal reform projects that adopted an innovative model. This model was characterized by relying on a bureaucratic approach, case studies, and utilizing law as a means to achieve specific economic and social goals. This enabled confronting economic and social challenges and effectively influencing the paths of change and supporting development in various sectors, whether private or public. As a field for study, application, and change, it witnessed a qualitative leap as a result of the Law and Development Movement. The concept of law radically changed in terms of its origin, logic, and social role [10].
Law was viewed as a system composed of legislation enacted and enforced by the state. However, this perception evolved, and law became a flexible tool that adapts based on deeper goals and more open principles. Law now interacts dynamically with surrounding circumstances and is subject to more discretionary and broader interpretations. Emphasis also increased on understanding legitimacy as a means to bring about real changes on the ground and to lead, thereby reinforcing the goal of social development.
Socio-legal analysis revealed the challenges facing the idea of transforming reality through legislative means alone, despite the great aspirations that accompanied the Law and Development Movement. However, the absence of realistic and comprehensive perspectives significantly reduced its effectiveness.
This type of law generally aims to protect public interests. Examples include labor laws for worker protection, environmental laws for nature protection, consumer protection legislation for consumer protection, and anti-discrimination laws for minority protection. This legislation stems from the conflict between various—and sometimes conflicting—interests inherent in modern society. Intertwined law acts as a criterion for balancing, meaning it identifies the interests that must be protected and balanced with each other during the process of conflict resolution. However, it does not provide guidance on how to do so [11].
The excessive focus on law as a tool, with neglect of its fundamental function in limiting state power, contributed to its transformation into a biased and elitist tool that benefits the most powerful actors in society, which led to deepening the traditional confusion between politics and law, especially in developing countries.
The Initial Failure of the “Law and Development” Movement in the Sixties and Seventies
This approach, led primarily by American institutions, failed due to its imposition of institutional transfer as a “ready-made” solution without local roots, which aroused systematic resistance from community actors and a failure to adapt to the legal and social reality of the target countries. This observation led to the end of the first wave of legal formalism [12].
Development was assumed to be a linear process passing through evolutionary stages, determined by merely establishing a specific legal framework—a superficial view more than what should be, and what was promoted as the most theoretically appropriate, but practically failed to achieve the expected. The excessive reliance on the state’s role and the law emanating from it led to the suffocation of organizational forms that emerged spontaneously within society itself.
Despite the serious criticisms directed at the “Law and Development Movement” and its failure to achieve its ultimate goals, it nevertheless represented a significant turning point as the first attempt to systematically study the relationship between law and economic development.
These efforts emerged directly from a practical orientation rooted in the United States, based on modernization theory and legal realism, along with a selective reading of Max Weber’s works on the impact of law on the emergence of European capitalism.
Despite its shortcomings, it was recognized as a fundamental reference in modern writings that address the economic relationship of legal institutions. The first experience is addressed with study and criticism, moving away from its aspects of deficiency. However, with this, the increasing interest in studying the impact of the rule of law on development can lead to overcoming the limitations that the Law and Development Movement faced in the future [13].
Algerian Law Amendment: A Catalyst for Economic Development
Algeria witnessed a radical transformation towards a market economy in the early nineties, driven by the necessity of restructuring legal and political institutions, and in response to the pressures of economic crises and cooperation with international financial institutions (such as the World Bank and the International Monetary Fund).
This phase focused on reducing the role of the interventionist state, returning to “price truth,” and managing external debts, along with adopting reforms aimed at promoting competition, enhancing freedom of initiative, and dismantling the directed economic system that had prevailed since independence. Since then, a consensus supported by a diverse set of theoretical and empirical factors has formed. Reviews of structural adjustment programs have shown their weak results in terms of achieving higher and more sustainable growth rates for developing countries.
This modest performance is partly attributed to shortcomings and gaps in the existing institutional infrastructure, which failed to provide the necessary support for the effective functioning of markets. On the theoretical level, advanced developments in development theory have highlighted the role of the institutional framework, whether formal or informal, as a necessary condition for the success of the development process and a crucial factor explaining successful economic experiences, especially those notable experiences in Southeast Asia.
From this new perspective, the rule of law is considered a fundamental institutional element for achieving economic development [14].
It grants protection to property rights, where institutions and individuals have the ability to own assets, use them, and dispose of them freely within the constraints of legal balance between public and private interests.
It also provides transactional stability through an institutional structure that enables parties to conclude contracts (whether civil or commercial) with confidence, along with legal guarantees for enforcement in case of disputes.
The transparency and accountability in the rule of law are based on four universal principles: fair law, open government, impartial justice, and preventing abuse of power.
Developing the economic environment leads to attracting investments, as the existence of a “predictable” legal system ensures that everyone knows in advance the limits of state power, their rights, and their legal obligations.
This system requires providing legal stability through the existence of an effective framework for the separation of powers, where the effective performance of this framework enhances the credibility of government policies and regulatory regulations. This institutional framework must reduce transaction costs, thereby contributing to facilitating and expanding the scope of economic activities and enhancing their efficiency and productivity levels.
The Modern View of the Role of the Legal System in Economic Development in Algeria
The modern view of the role of the legal system in economic development is considered a product of the developments in the new institutional economics [15]. This view offers contributions to the concept of institutions as “rules of the game,” which are human-made constraints that reduce uncertainty and enhance the ability to predict human behavior, thereby reducing transaction costs. Therefore, institutions are considered organized systems that define social norms and establish expectations for behavior.
The impact of institutions on economic development is manifested through defining property rights precisely, which are considered a set of legal prerogatives transferable for free trade. Douglass North, a Nobel laureate economist, believes that institutions are “rules of the game” in society, including formal constraints (constitutions, laws, and property rights) and informal constraints (customs, traditions, and taboos) that humans establish to regulate political, economic, and social interactions. Their fundamental role lies in limiting uncertainty in exchanges by defining available options, and consequently reducing transaction costs and enhancing economic performance. They are composed of formal constraints (like constitutions, laws, and rules) and informal constraints (like behavioral norms and customs), as well as “their enforcement characteristics, and the belief of actors in the necessity of respecting certain institutions.” Therefore, institutions are considered the “rules of the game” that regulate economic exchanges in society.
In this sense, they play a crucial role in growth, either by promoting or hindering technological progress [16].
Developing institutions that incentivize innovation, such as property rights (patents), and companies with limited liability, contributes to creating incentives that encourage economic development. On the other hand, state intervention in property rights through taxes or regulations can diminish their value by restricting individuals’ prerogatives in making economic decisions. Meanwhile, policies aimed at reducing intervention contribute to enhancing these rights and their associated value.
Political and legal institutions play a pivotal role in ensuring and preparing the necessary conditions for the effective exchange of property rights. This requires a clear definition of these rights, guarantees for freedom of contract, and a robust legal system based on the separation of powers and effective coordination between them.
The effectiveness of this framework relies specifically on the independence of judicial institutions, their efficiency, and transparency in performing their functions in a way that serves the institutional system. According to the concept of institutional economics, the institutional framework is considered a primary factor in influencing individual behavior by regulating and restricting it in line with their preferences within the imposed institutional boundaries. Institutions work to incentivize certain behaviors and deter undesirable actions through sanctioning them, and supporting those considered socially desirable [17].
Given that individuals’ preferences tend towards a certain level of stability and consistency, individual behavior can be interpreted based on existing institutional incentives. The existence of specific institutional incentives allows for predicting the general tendency of economic behavior. The success of economies is historically linked to the existence of clear property rights and representative governments that include a legal framework based on the rule of law.
This correlation highlights the importance of the fundamental role of institutions in shaping economic performance in general, as they provide the necessary incentives for skills and knowledge essential for achieving optimal results for economic activity.
Formal legal framework is not the sole factor responsible for achieving stability and predictability, as informal institutions play a complementary role, sometimes more important at the micro-level. These institutions include mechanisms such as reputation and forms of dispute resolution outside formal channels. They have proven to have a greater economic impact than formal rules.
Many researchers, including North, have indicated that economic performance often relies on a mix of formal legal rules and informal customs that are characterized by gradual evolution, unlike formal laws that can be changed relatively quickly. Customs are considered an extension of formal rules, among the private sources for general legal norms [18].
While customs are forms of traditions, private regulations are a type of “quasi-legislation,” which are what constitute the prevalent form of law. They act as social or behavioral norms within specific social groups and are transmitted through culture without the need for intervention from a central authority [19].
It seems that many societies have moved from custom to law, with the modern development of “Leviathan” [20] and “formal sources” of law [21]. For a long time, “primitive” or non-governmental societies did not know, other than custom, as law for them, without the existence of written rules to replace or complement it. Therefore, it is noted that custom was dominant over the oldest forms of law everywhere (Islamic, Roman, Phoenician, Chinese, etc.) [22].
Despite the absence of a global consensus on how to achieve this, researchers offer efficiency criteria as a basis for evaluating the effectiveness of these institutions and the extent of their continuity and enhancement.
Theoretical Foundations for the Economic Analysis of Legal Institutions in Algeria
Modern institutional theory analyzes Algerian institutions as “rules of the game” that regulate the behavior of economic and political actors in Algeria. These structures are not limited to the administrative aspect only, but rather act as internal variables that directly affect resource allocation, decision-making, and growth. This approach enables us to evaluate how political and legal frameworks influence economic performance and development at the national level.
This approach is characterized by its adoption of the classical economics’ starting points, especially concerning the maximization of utility and the individualistic approach. It acknowledges, to some extent, that individuals do not necessarily possess all the information necessary to achieve optimal efficiency, and that they often behave opportunistically in an environment characterized by high transaction costs.
The school of property rights attaches particular importance to transaction costs as a central concept for understanding the role of institutions in promoting economic growth. This school indicates that ensuring efficiency in the market requires the existence of clear, exclusive, and transferable property rights. In the absence of such rights, negotiation costs rise significantly, which may lead to market inefficiency in resource allocation [23].
This statement sheds light on a key economic concept known as transaction costs, which are the expenses that arise from activities related to completing commercial operations. These costs include the expenses of collecting information necessary for decision-making, drafting contracts between parties, in addition to monitoring costs to ensure compliance with conditions, and enforcement costs to ensure the achievement of agreed-upon agreements.
The combination of law and economics represents a field of immense importance. However, it is not without its flaws or challenges that deserve deep consideration. Among the most prominent of these flaws is the tension between theory and practical reality, a complex challenge that researchers in the field of law and economics will continue to face in the long term. Nevertheless, acknowledging the existence of weaknesses in this intellectual intersection does not in any way mean calling for its reduction or abandonment of its value [24].
Despite the shortcomings that may affect this field, the combination of law and economics continues to offer new insights, rich investigations that enhance our understanding of legal systems and their mechanisms. In reality, it cannot be denied that insisting on making efficiency the sole goal of law may encounter opposition in some intellectual or societal circles [25].
The prevalent opinion among a large number of people—perhaps the majority—still tends towards the belief that the pursuit of efficiency should be among the priorities of any legal system that works to achieve justice and social order. In the end, the integration of law and economics remains an ambitious intellectual project that opens new horizons for a deeper and more comprehensive understanding of the relationship between these two fundamental fields in the life of societies [26].
The potential gains or expected benefits may outweigh the costs. When transaction costs rise to unsustainable levels, leading to the erosion of the incentive to conduct trade, this can lead to the collapse of the market or its obstruction to a degree that prevents its emergence in the first place. In such cases, it becomes necessary to search for alternative solutions to compensate for these failures.
Among the common solutions is the adoption of hierarchical structures within companies, with the aim of achieving economic efficiency and reducing friction, or government intervention through setting regulations and rules aimed at reducing these costs and ensuring the continuity of trade to achieve economic stability and sustainable development.
Institutions, including legal institutions, are established with the aim of managing these constraints and minimizing their effects, which contributes to improving the allocation of societal resources. Institutional responses to these challenges are manifested through several mechanisms, such as: providing a legal definition of property rights, ensuring contract enforcement through the judicial system, and achieving stability for legal rules through a system of checks and balances.
These institutional mechanisms collectively provide a regulatory framework that stimulates private economic activity and enhances its effectiveness. The fundamental concept for legal institutions in this context is that they are frameworks that form incentives and guide economic behavior towards achieving optimal efficiency [27]. Based on the economic analysis of law, we can consider legal norms as primary tools aimed at guiding behaviors in a way that leads to achieving specific economic and societal goals [28].
Just as the market operates based on price signals, law is viewed as a system for designing incentives and obstacles that guide individual behavior in line with the desired goals and legal directives. Law influences individual behavior by modifying the structure of benefits and costs associated with available options according to legal rules. From here, the necessity arises to establish a legal system that enhances the ability to shape individuals’ behavior so that their actions align with the goals and public interests that society seeks to achieve.
As for studying the roles played by formal and informal institutions, and their complementary role in economic development, it draws heavily from the research of Douglass North in the field of economic history [29]. North’s work focuses on analyzing the factors that contribute to shaping the institutional framework and its impact on economic performance. In this regard, the institutional framework is considered a composite of formal laws and informal arrangements that include customs, traditions, and cultural values.
For North, the existence of institutions capable of protecting property rights and ensuring contract enforcement is considered a fundamental factor explaining the success of developed countries. From this perspective, the market can be understood as a complex system composed of a diverse set of institutions; some contribute to improving efficiency, while others may be a source of economic challenges.
Comparing the institutional framework of developed countries, such as the United States, England, France, Germany, and Japan, with their counterparts in developing countries, or across the industrial history of these economies, it becomes clear that relative success depends largely on this institutional framework and its effectiveness and development over time and in different regions in achieving the goals of economic development and growth [30].
Overcoming Weaknesses and the “Law and Development Movement”
New institutional economics contributed to redefining the discussion about the relationship between law and development, transcending the traditional framework known in the context of the “Law and Development Movement.” In this new approach, the legal system is no longer defined as an instrument with social goals or objectives. Instead, it focuses on establishing regulatory rules that contribute to facilitating economic processes [31].
Law has become a tool for regulating state power and reducing its excessive intervention in the economic sphere [32], reflecting a shift towards transforming law into a restrictive framework for power, instead of being considered a means for manipulation according to state directives. The contributions offered by the new institutional analysis enabled researchers to address many of the shortcomings that plagued the first wave of the Law and Development Movement.
Unlike the “Law and Development Movement” in the past, the new wave is characterized by its reliance on a clear theoretical framework based on the economic analysis of institutions, which is the cornerstone of new institutional economics [33].
The focus, unlike the previous approach that focused on social change, has now shifted to economic development defined by increasing growth and measured by indicators such as GDP. Legal frameworks have become the focus of deep interest in judicial reform, including protecting property and contractual obligations more clearly.
Legal institutions have become a fundamental axis for shaping a predictable and stable economic environment, as they play a central role in regulating the political power of the state through enhancing the rule of law and activating the principles of separation of powers and the system of checks and balances [34].
In the past, the Algerian legislator relied on superficial efficiencies to implement legal reforms related to various social goals, without considering their effectiveness or the application of rules. Today, attention has shifted to ensuring the effectiveness of these rules through the synergy of institutional and judicial reform, with a guarantee of judicial independence as a condition for the success of any legal reform. The endeavor to establish the effectiveness of laws has led to redirecting the system towards judicial reform to become the primary bearer of reforms aimed at establishing the rule of law.
While the traditional “Law and Development Movement” relied on graduating new jurists who were expected to bring about social transformations, the new vision grants judges a central position as guardians of law enforcement, equally for individuals and states [35].
Finally, the new assumption about the importance of informal institutions and their role as complementary to formal institutions has contributed to enhancing a deeper understanding of self-organizing social patterns. Unlike the previous wave that linked reform to formal institutions emanating from the state, today the legal framework is viewed as an institutional system that works in harmony with the informal social infrastructure to stimulate stability, transparency, and promote self-initiatives [36].
As for any process of transferring institutions from developed countries to other developing countries, it has been shown that adopting ready-made models for institutional and legal organization is not a fruitful approach. This is because the effectiveness of these models depends on their application to local contexts and informal institutions.
Recently, modern literature, especially in North’s works, has highlighted the need to consider the complexity inherent in radical institutional transformations [37].
Legal Entrenchment for the Challenges of the New Economic Orientation
Despite the contribution of the new economic orientation in analyzing the relationship between law and development, it faces difficulties in addressing some chronic problems and raises new challenges at the same time. This is due to the limitations of its economic interpretation of legal and political institutions.
These shortcomings become clear when comparing this approach with analytical frameworks from other disciplines, such as constitutional law, legal theory, and socio-legal analysis, which address legal institutions integrated into the rule of law in a more comprehensive and complex manner.
One of the main limitations of the new economic theory is its excessive focus on a unidirectional causal relationship between legal institutions and economic development. Research conducted from this perspective indicates that the industrial specialization actually differs significantly with the variation of the institutional environment, which leads to a narrowing of analysis and prevents understanding the interaction between them and measuring the impact of development on legal systems [38].
Many theories in economics seek to shed light on institutional diversity and its interaction with the issue of economic performance in different countries. Some of them rely on the logic of overall coherence for macroeconomics to explain the impact of the institutional environment on economic performance, while others adopt the previously discussed logic, proposing a theory for the institution based on the internal accumulation of resources and entrepreneurship.
However, all theories almost emphasize the importance of systemic effects that can create a link between the institutional environment as a whole and the performance of the economy concerned, meaning that they are based on the existence of integration between different dimensions of the institutional space that has been analyzed.
Despite the theoretical acknowledgment that institutions change in response to new economic factors, such as changes in relative prices and the behavior of organizations that exploit gaps in the institutional system, they still tend to view institutions as independent and stable variables that limit individual behavior and support actions that contribute to distinguishing economically successful countries from others in the long run [39].
For Weber, the development of modern capitalism necessitated the establishment of a legal system that provides economic actors with protection.
Conclusion
In Algeria, the new institutional economic system emphasizes the importance of establishing a stable legal framework as a crucial factor for reducing uncertainty and enhancing economic predictability, thereby promoting sustainable growth paths. These institutions work to protect property rights and ensure contract enforcement, which are two essential pillars for achieving economic diversification in a country traditionally reliant on the hydrocarbon sector.
Thanks to these reform policies, Algeria has achieved a remarkable leap in its non-hydrocarbon exports, whose value tripled to reach 5.1 billion US dollars by 2023. These results highlight the tangible positive impact of these reforms on the path of comprehensive economic development.
The new economic theory in Algeria has made significant contributions to understanding the role of legal institutions in promoting economic development in recent years. This theory has overcome many of the limitations that led to the crisis of the movement known as “Law and Development,” as it offers a more complex and clear vision for defining legal and economic institutions, along with a critical review of the idea of employing law as a tool to achieve economic goals.
According to proponents of the institutional approach, economics is considered a comprehensive system composed of interconnected and interrelated activities that are not limited to material dimensions only, but also include knowledge, human skills, and technologies, in addition to capital and the material infrastructure that forms the basis for these activities.
This system is also characterized by the existence of a complex and dynamic network of human relations based on customs and traditions, imbued with beliefs and feelings rooted in the culture of Algerian society. It acts as a driving force that strengthens the cohesion of the economic and social fabric. It also recognizes the importance of informal institutions and their role in shaping opportunities and creating legal solutions in the face of desired institutional changes.
As for the new challenges faced by economics, the theory narrows its scope of interpretation for legal institutions, as it attributes their functions to achieving purely economic goals, ignoring that the traditions of law also express other goals and values that may conflict with the economic perspective based on maximizing individual interests.
The main contribution of the theory appears clearly in the way it introduces the concept of institutions in the study of development theories and economics. It has also worked to integrate analytical approaches and concepts from multiple fields, such as political science and law. Its main strength in this lies in its multidisciplinary and comprehensive perspective.
Footnotes
[1] Interest in the relationship between law and development emerged as a central topic in the mid-1960s. This field of research gained increasing momentum thanks to contributions from legal sociologists, economists, and various development theories. This interest was aligned with what became known as the “Law and Development Movement,” sponsored by the U.S. government as part of its development aid strategies directed toward countries in Africa, Latin America, and Asia.
[2] This topic regained significant prominence in the 1980s, driven by the rise of new institutional economics alongside policies adopted by the World Bank and other regional development banks.
[3] Institutional economics is a school of economic thought that focuses on the role of institutions—such as laws, social norms, and firms—in shaping economic behavior, rather than focusing solely on prices and markets. This approach incorporates social and psychological factors and seeks to explain how the rules governing economic transactions influence development. It is generally divided into two main strands: old and new institutional economics.
[4] The constitutional entrenchment of freedom of trade, investment, and entrepreneurship, the principle of legal certainty, and the deep legislative reforms ordered by the President of the Republic—effectively implemented, particularly through the revision of the legal and institutional framework governing investment, the use and valorization of economic land, the reform of the banking and financial system, as well as public procurement law—have been placed at the core of presidential priorities, as one of the key pillars of development dynamics. From the outset, he called for “the decriminalization of managerial acts” and explicitly emphasized in his program the need to “enshrine a policy of protecting honest state officials engaged in management.”
(Speech of the Prime Minister at the opening of the national conference on “Legal Security and Its Impact on Economic Development,” December 27, 2025.)
[5] Stanislav Andreski, Max Weber’s Insights and Errors (London: Routledge, 2013); Max Weber, Economy and Society: An Outline of Interpretive Sociology, 2 vols., ed. G. Roth & C. Wittich (Berkeley, Los Angeles & London: University of California Press, 1978); Max Weber, The Protestant Ethic and the Spirit of Capitalism, trans. Talcott Parsons (New York: Charles Scribner’s Sons, 1958), pp. 91–92, cited in George Ritzer, Sociological Theory (New York: Alfred A. Knopf, 1983).
[6] Based on this theory, the belief became established that the development of societies—particularly in social and political terms—proceeds through a series of successive stages, the final stage of which should culminate in rationalization.
[7] Algeria seeks to promote an entrepreneurial spirit through a comprehensive strategy involving the National Agency for the Support and Development of Entrepreneurship (NESDA) and Entrepreneurship Development Centers (CDE). Support is provided through guidance, training, and financing. In addition, the state focuses on supporting entrepreneurship through digital transformation, promoting women’s entrepreneurship, and encouraging self-employment schemes, with the aim of diversifying the national economy, reducing unemployment, and fostering the growth of small and medium-sized enterprises.
[8] Investment has been defined by economists as “any acquisition of capital goods with a view to obtaining or consuming the income derived from them” (RAMOEUF, Dictionary of Economic Sciences, vol. 1, entry “investment,” by DIETERLEN).
[9] On March 15, 2020, the Bank of Algeria reduced the required reserve ratio from 10% to 8%, and lowered the key interest rate by 25 basis points to 3.25%. On April 6, 2020, it announced the easing of solvency and liquidity ratios and allowed banks to extend loan repayment periods without requiring corresponding provisions. On April 30, 2020, it further reduced the key interest rate to 3.00% and lowered the reserve requirement from 8% to 6%, while also reducing interest rates on government securities used in refinancing operations. On September 14, the reserve requirement was reduced again from 6% to 3%, and one-month open market operations were activated. On January 6, 2021, the Bank of Algeria extended the easing of prudential requirements for banks until March 31, 2021. These measures aimed to promote greater financial inclusion through digitalization and innovative products, and to raise refinancing thresholds for negotiable public securities.
[10] The “Law and Development Movement,” which emerged in the 1960s and 1970s, represents a turning point in legal and economic thought, as it was the first academic and systematic attempt to link legal systems to economic development processes. However, it sometimes suffered from shortcomings and failed to achieve its practical objectives.
[11] Hydén, H. (2022). Sociology of Law as the Science of Norms. Oxfordshire: Routledge.
[13] It is necessary to distinguish between several aspects of economics. Economics describes human behavior in the face of resource scarcity, based on an in-depth study of reality. It then provides a logical explanation of facts, identifies relationships between them, and can formulate predictions. It assesses whether the objectives of economic actors are compatible and economically viable, and whether the means chosen to achieve these objectives are appropriate. This last aspect is crucial: by identifying the necessary and sufficient conditions for achieving certain goals, economics proposes a technical rule. Some may be inclined to call it a “norm,” but this is a misleading term. A technical rule is not normative in the strict sense—it is not binding; it simply indicates the most technically appropriate course of action. At this level, the reasoning is hypothetical rather than definitive. Economics here converges with operations research and decision theory, often involving the search for the maximum or minimum value of a predefined function under given constraints. This work lies at the intersection of logic, mathematics, engineering, and economics.
(See: T. Koopmans, Three Essays on the State of Economic Science, 1957.)
[14] The rule of law plays an important role in ensuring a stable and predictable legal system, clearly defining property rights and providing the institutional framework necessary for the proper enforcement of contracts, whether in the public or private sector.
[15] This influence is clearly reflected in the pioneering work of Nobel laureate economist Douglass C. North.
[16] North, D. C. (1991), “Institutions,” Journal of Economic Perspectives, vol. 5.
[17] The peoples of the world affirm in the Charter of the United Nations their determination to establish conditions under which justice can prevail and to promote international cooperation in encouraging respect for human rights and fundamental freedoms without discrimination. The Universal Declaration of Human Rights enshrines principles such as equality before the law, the presumption of innocence, and the right to a fair and public hearing before an independent and impartial tribunal. The International Covenants further guarantee these rights, including the right to be tried without undue delay. Nevertheless, a gap often persists between these principles and reality.
[18] Custom is an important subsidiary source of law. While legislation (written law) is the primary source, judges may rely on custom to fill gaps where no legislative provision applies, provided that such custom does not conflict with public order or mandatory rules.
[19] G. Radbruch, “Custom is a formal source,” in Legal Positivism, 1993.
[20] Leviathan is a classic Western work on the theory of the state, comparable to Machiavelli’s The Prince. Hobbes developed the idea of the social contract and absolute authority in the context of the English Civil War (1642–1651). He argued that civil war results from the state of nature (“war of all against all”) and can only be avoided through a strong, unified government.
[21] J. Carbonnier, Flexible Law, 1995.
[22] P. Deumier, “Kanak Custom, Pluralism of Sources…”
[23] Property rights theory was formulated in the 1960s, following Ronald Coase. Key contributors include Coase, Alchian, Demsetz, Manne, Cheung, Furubotn, Pejovich, and Alessi. Their interdisciplinary work significantly advanced the analysis of property rights.
[24] J. D. Hanson and M. R. Hart (1995), p. 330.
[25] Coase, Ronald H. (1996), “Law and Economics and A. W. Brian Simpson,” Journal of Legal Studies, vol. XXV, January, pp. 103–119.
[26] Economist Ronald Coase was the first to highlight the importance of transaction costs in economics. In his seminal 1937 article “The Nature of the Firm,” Coase introduced a new perspective that challenged traditional models of perfect competition, which ignored frictions and obstacles. This realistic approach laid the foundation for the emergence of new institutional analysis, focusing on transaction costs as a central element in understanding how institutions and markets function. Despite its importance, the article faced criticism from many economists, including some from the Austrian school, who pointed to his claim that “the reason why an integrative force represented by the entrepreneur’s authority replaces the price mechanism requires explanation.” According to his theory, the hierarchical structure created by the entrepreneur within the firm substitutes for the voluntary or contractual coordination characteristic of the market, thus representing a shift away from the price mechanism.
[27] Reuter, “Principles of Public International Law,” Collected Courses of the Hague Academy of International Law, vol. 103, p. 516 (1961/II); H. G. Schermers, International Institutional Law, vol. 1, pp. 4–25.
[28] In general, the economic analysis of law appears capable of enhancing the explanatory and predictive power of economic models, thereby enabling economists to participate in normative discussions aimed at developing legal rules that align with economic and social realities—particularly in areas such as competition policy, dispute resolution, and the fight against economic and financial crime.
[29] In his book “Understanding the Process of Economic Change” (2005), Douglass North emphasized placing institutions at the core of economic analysis, stressing the need to prioritize institutional change as an essential component of any development strategy. North argues that institutions play a decisive role in determining economic performance, as they provide the incentive structure that shapes the direction of economic change—whether toward growth, stagnation, or decline.
[30] North maintains that the emergence of these innovations was not accidental, but rather the result of the interaction of two main factors. The first is economies of scale arising from the significant expansion of trade and exchanges within Europe. The second is the development of effective mechanisms to ensure compliance with contractual agreements, such as strengthening the judicial system, developing commercial law, and expanding courts. These factors contributed to reducing transaction costs, thereby making commercial operations more efficient and profitable.
[31] Consequently, binding guarantees for the protection of private property and the enforcement of both private and public contracts replaced the earlier ideological emphasis on social change as the primary objective of legal institutions.
[32] Cf. Côte, Marc, Algeria (Paris: Masson/Armand Colin, 1996).
[33] This development is largely attributed to the pioneering work of Douglass North, who provided a fundamental framework for understanding the importance of legal guarantees for property protection and contract enforcement as institutional tools for enhancing market efficiency.
[34] In 2025, Algeria enacted a new Code of Criminal Procedure aimed at protecting public funds and the national economy. It introduced new provisions aligned with societal developments and ensured the protection of rights and freedoms in accordance with international agreements ratified by Algeria. The Algerian legislator also adopted legal measures to create an attractive environment for both domestic and foreign investment by offering guarantees against non-commercial risks and simplifying procedures to strengthen confidence in the investment climate.
[35] Roger Cotterrell, “The Concept of Legal Culture,” in David Nelken (ed.), Comparing Legal Cultures (New York: Routledge, 1997), p. 13.
[36] Lawrence M. Friedman, “Legal Culture and Social Development,” (1969) 4 Law & Society Review 29, 34.
[37] J. Hédoussi (1995) writes: “Public sector managers (…) were not fully convinced that it was their duty to act as a force for development and analysis, let alone to make proposals. Many were genuinely reluctant to question (…) the authoritarian management style from which they believed they benefited; (…) while fewer preferred to maintain a system of patronage in recruitment and promotion, opposing any evolution of the system.”
[38] Bassanini, A. & Ernst, E., “Labour Market Regulation, Industrial Relations and Technological Regimes: A Tale of Comparative Advantage,” Industrial and Corporate Change, vol. 11, no. 3, July 2002, pp. 391–426.
[39] For Weber, the development of modern capitalism required the establishment of a system that provides economic actors with protection.
[44] Pierre Lascoumes and Évelyne Serverin, “Theories and Practices of the Effectiveness of Law,” Droit et Société, no. 2, 1986, pp. 127–150.
[45] Reducing “all means” in the “final analysis” to the “quantity of labor” provided is an error.
(Max Weber, Economy and Society, Paris, 1995, p. 105.)
[46] In 1986, in a special issue of the journal Sociologie et Sociétés devoted to the sociology of law, Guy Rocher published his study “Law, Power, and Domination.”
(Guy Rocher, “Droit, pouvoir et domination,” Sociologie et Sociétés, vol. 18, no. 1, April 1986, pp. 33–46.)
[47] In this sense, “the effects of law are not the result of the ‘force of law’ alone, but also of the strength of other normative systems with which law interacts, upon which it relies, or against which it encounters resistance or opposition.”
[48] Jean M. Lapierre, Guy Rocher, and Guylaine Vallée, “Legitimacies and Legitimation of Grievance Arbitration: The Concept of Learning in Luhmann,” in M. Coutu and G. Rocher (eds.), The Legitimacy of the State and Law: Around Max Weber, pp. 355–384.
[49] The second chapter of the government’s action plan for implementing the President’s program, entitled “For Economic Recovery and Renewal…”
[50] Jean-Philippe Colin and Ali Daoudi, Land Dynamics, Agrarian Dynamics, pp. 399–471.
[51] In his book Justice in Its Garb, legal philosopher Ronald Dworkin explains the reasons behind this concern.
[52] For Dworkin, law is an interpretive practice tied to integrity and justice, rather than merely a tool for optimizing resources.