Asian Development Bank: 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 enable businesses to expand, integrate into global markets, and invest with confidence.

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

Author: Thomas Michael Clark

Global evidence consistently shows that countries with stronger rule-of-law frameworks attract higher levels of investment, command lower risk premiums, and achieve more stable long-term growth. Investors closely monitor rule-of-law indicators when allocating capital, while credit rating agencies incorporate these factors directly into their assessments—ultimately influencing the cost of borrowing.

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

However, in many countries, uncertainty persists. Challenges range from weak contract enforcement and underdeveloped secured lending and collateral frameworks to insolvency and restructuring regimes that lag behind the needs of modern economies. Legal systems often fail to adequately support micro, small, and medium-sized enterprises (MSMEs), which form the backbone of national economies.

MSMEs account for over 95 percent of all businesses in Asia and the Pacific, employ around 60 percent of the workforce, and generate approximately 40 percent of economic output. Despite their importance, many struggle to formalise operations, access finance, and participate in regional and global markets.

Author: Christina Pak

Modern legal frameworks can play a transformative role. Company laws should make it faster, simpler, and more cost-effective for small businesses to register and operate. Secured transactions frameworks must evolve beyond reliance on land, enabling movable assets—such as equipment, inventory, and receivables—to be used as collateral. This shift can unlock new financing opportunities for thousands of enterprises.

Insolvency regimes should be streamlined, affordable, and capable of restructuring viable businesses, with cross-border provisions that reflect increasingly interconnected markets. At the same time, the estimated $1 trillion lost annually to unresolved low-value commercial disputes highlights the need to expand online dispute resolution mechanisms, offering businesses faster and more affordable pathways to resolve conflicts and continue growing.

Strengthening the rule of law is therefore not an abstract goal—it is a practical necessity for economic development.

Mobilising private capital is also critical to closing the substantial financing gap for low-carbon and environmentally sustainable development. Beyond foundational commercial laws, countries require modern legal frameworks to participate effectively in emerging environmental markets, particularly carbon markets.

Many economies in Asia and the Pacific still lack clear rules governing carbon-crediting projects, including standards for social and environmental safeguards, as well as robust monitoring and enforcement mechanisms. In numerous jurisdictions, carbon rights and the legal status of verified carbon credits remain undefined. Without clarity, investors face uncertainty, and the development of high-integrity carbon markets is constrained.

To attract private finance for conservation and the sustainable management of natural resources, legal systems must support innovative financing 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, helping to guide investment decisions and strengthen transparency for financial institutions and investors.

Effective dispute resolution is another cornerstone of a strong private sector. Businesses are more willing to invest and expand when they trust that disputes will be resolved fairly, efficiently, and at reasonable cost—and that outcomes will be enforceable.

Across the region, alternative dispute resolution—mechanisms that allow disputes to be settled outside traditional court systems—has become increasingly important. These approaches reduce pressure on overburdened courts while providing specialised commercial expertise. International arbitration continues to grow, although many countries still need stronger legislative frameworks aligned with global standards, alongside enhanced judicial capacity to enforce foreign arbitral awards. With the Singapore Convention on Mediation now in force, there is also a clear opportunity to expand the use of international mediation.

As countries adopt and refine dispute resolution frameworks, avoiding legal fragmentation is essential. Consistent implementation of policies and standards strengthens predictability in cross-border transactions, deepens regional integration, and enhances investor confidence—particularly in an increasingly uncertain global environment.

Strong rule-of-law systems are fundamental to private sector-driven development. They reduce risk, build trust, and improve the overall investment climate. For economies across Asia and the Pacific seeking to attract private investment and support long-term growth, strengthening fair and reliable legal systems offers substantial and measurable returns.

ADB’s Law and Policy Reform Programme supports countries in building the legal foundations required for private sector-led growth. The programme facilitates policy dialogue, legal diagnostics, legislative drafting, and capacity building for policymakers, judges, legal professionals, and the private sector. i

About the Authors

Thomas Michael Clark is General Counsel at ADB.

Christina Pak is Assistant General Counsel, Law and Policy Reform, Office of the General Counsel at ADB.

The views expressed are those of the authors and do not necessarily reflect the views of the Asian Development Bank, its management, Board of Directors, or member countries.