Creating

64 DOING BUSINESS IN 2006
loans at 4 percentage points less interest than in regions
with the longest delays.
Second, efficient courts increase entry by new firms
and hiring by established ones. In Central and Eastern
Europe cumbersome court procedures are associated
with an 8% reduction in the number of new businesses.
They also limit company growth: businesses, that are
otherwise similar hire 18% fewer workers in countries
with slow contract enforcement. 2
Third, reform reduces demands on the government
budget. For example, Croatia, Poland, Serbia and Montenegro
and Slovenia have the most judges and court administrative
staff (on a per capita basis) in Europe. These
countries also have the most complex court procedures
and longest court delays in the region. Simplified conagement
in 15 pilot courts. In these courts the number
of cases pending for more than a year dropped 23% by
June 2005 compared with a year earlier. In contrast, the
number of such cases fell by 5% in other courts.
Vietnam expedited contract enforcement by 2
months by moving cases to lower jurisdictions. This was
accomplished by abolishing a provision mandating that
provincial courts hear cases involving more than 50 million
dong ($3,200). Such cases now go to district courts.
A similar reform in Lao PDR in 2003 allowed debt collection
cases worth less than $2,500 to be handled in
district courts.
Cut the number of appeals to the supreme court
Appeals are necessary for fair justice and are allowed in
every country. But they needn’t automatically go all the
way to the supreme court. Such abuse is exemplified in
Brazil, where debtors use the tactic to stall enforcement:
88% of judgments in commercial cases are appealed.
As a result Brazil’s supreme court handles more than
115,000 cases a year. In comparison, the U.S. supreme
court takes about 200 cases, as it deals mainly with constitutional
issues. Federal circuit courts and state courts
of appeal are the main venue for appeals on commercial
cases. These intermediate courts are the most important
source of due process for litigants. Access to them is generally
easy since the grounds for appeal to the supreme
court are limited.
The old system in the Czech Republic worked like
this: when a debtor appealed the decision of the firstinstance
court, the case was sent to an appeals court,
which often overruled the decision and sent the case for
retrial to the original court. Now the appeals court has
Why reform?
There are several strong arguments for court reform.
First, easier contract enforcement is associated with
higher bank lending (figure 10.3). Consider Italy. A
study of 27 judicial districts found that the average
commercial case lasts 53 months, or nearly 4.5 years. 1
This is just over the 1,390 days documented using the
Doing Business methodology. The delays cause large case
backlogs. In efficient judicial districts like Venice, there
are 22 cases pending per 1,000 inhabitants. Lending to
the private sector is equivalent to 40% of the region’s annual
income. In Calabria, where the backlog is 50 cases
per 1,000 inhabitants, lending is just 10% of the region’s
income. The price of loans is affected as well. Banks in
Italian regions with the shortest court delays extended
expanded authority to issue a final and binding judgement.
Fewer cases go to the supreme court. As a result
the process is 4 months shorter.
Not everyone has gotten such reforms right. The
2004 civil procedure code in Burkina Faso establishes
a stay on the execution of appealed judgments under
several conditions. If granted, the stay could last 2 years
while the case is sent to the supreme court. This more
than doubles the average time to enforce a contract:
rather than 446 days, such a case would take more than
1,200. A possible fix is to introduce an appeal bond—
money put aside by the debtor until the appeal is considered.
Such bonds are used to guarantee that judgments
will be satisfied after appeals. The money should be allowed
to accumulate interest, as its value may deteriorate
quickly in countries with high inflation.
Make enforcement competitive
The best way to speed the recovery of overdue debt is by
allowing competition in enforcing judgments. Colombia
did this in 2003 by scrapping the monopoly of the courts
to enforce judges’ rulings. Private companies quickly
moved into the business. The result: time was cut by
nearly 2 months.
Hungary and Slovakia have introduced private enforcement
in the past 5 years. In the Netherlands a
2001 reform removed territorial monopolies of private
enforcement companies. Now they compete for business
nationally. Kazakhstan has done the same, as has
Burundi. In Kazakhstan it takes 20 days fewer to recover
overdue debt. The effects in Burundi are still unclear, as
the new industry is just being created.