Business Removing

59
Enforcing contracts
Who is reforming courts?
What to reform?
Why reform?
“I have had a company for 10 years. I’ve brought 15 cases
against customers for nonpayment, but I’ve never been
able to win a judgment. The courts are full of cases. The
rats eat the paper. The courts lose volumes of cases. Our
cases are not big enough to pay the bribes judges would
accept. So we don’t bother, we just can’t collect our
debts.” 1 These are the words of Facundo, a businessman
in Buenos Aires. They may as well be the words of an entrepreneur
in Bolivia, Indonesia, Lebanon, Poland or
Serbia and Montenegro, countries where debt collection
through the courts takes years.
Why do courts in so many developing countries perform
so poorly? The problem is not the quality of judges
or the lack of resources. More training and more resources
would help. But the main reasons lie elsewhere. A
striking difference between courts in most developing
countries and those in OECD countries is the overly bureaucratic
judicial procedures that judges and litigants
face when resolving a dispute (figure 8.1). It takes 58 procedures
for a creditor to collect her debt in Sierra Leone
but only 11 in Australia, and 55 procedures in Egypt but
only 14 in Norway. Each additional procedure costs more
time and money. Frequently, bribes change hands to
move the process along. In Cambodia, for example,
judges top the list as the most corrupt public servants. 2
In many countries only the rich can afford resolving
disputes through the courts. For the rest, justice is out of
reach. In Venezuela recovering an overdue debt of
$8,000 (twice the annual income per capita) would often
cost $2,500 in court and attorney fees. In the Philippines
the creditor might pay as much as $1,000 to recover a
debt worth $2,000. In Indonesia the fees for collecting a
debt of $2,000 can be higher than the amount claimed.
Businesses have little incentive to use the courts.
In the absence of efficient courts, fewer investments
and business transactions take place (figure 8.2). Those
that do involve a small group of people linked through
kinship, ethnic origin or previous dealings. This substantially
reduces the economic benefits that come from trade.
Some would argue that more formality in dispute
resolution ensures that due process is followed and justice
is done. The evidence suggests otherwise. The more
complex the procedures for resolving disputes, the less
likely firms are to report that judges are impartial and
court decisions fair. 3 In the words of the former Assistant
Attorney General of Mexico: “It is often stated that
delay in the administration of justice is equivalent to a
denial of justice. If this is so, Mexico is plagued by de-
FIGURE 8.1
Courts in poor countries are inefficient
Cost and time to enforce a contract
35 Poor
countries
Cost
(court and legal fees
as a percentage of debt value)
Source: Doing Business database.
18 Middle income
421 Poor countries
countries
417 Middle income
countries
12 Rich
280 Rich
countries
countries
Time
(days from filing
to enforcement)