Why it Matters
Efficient contract enforcement is essential to economic development and sustained growth (1). Economic and social progress cannot be achieved without respect for the rule of law and effective protection of rights, both of which require a well-functioning judiciary that resolves cases in a reasonable time and is predictable and accessible to the public (2). Economies with a more efficient judiciary, in which courts can effectively enforce contractual obligations, have more developed credit markets and a higher level of development overall (3). A stronger judiciary is also associated with more rapid growth of small firms (4). Overall, enhancing the efficiency of the judicial system can improve the business climate, foster innovation, attract foreign direct investment and secure tax revenues (5).
A study examining court efficiency in different provinces in Argentina and Brazil found that firms located in provinces with more effective courts have greater access to credit (6). Another study, focusing on Mexico, found that states with better court systems have larger and more efficient firms (7). In India, a study found that firms in industries that are contract-intensive, tend to locate in regions with good contract enforcement (9). Effective courts reduce the risks faced by firms and increase their willingness to invest (8). Firms in Brazil, Peru and the Philippines report that they would be willing to invest more if they had greater confidence in the courts (10).
Where legal institutions are ineffective, improvements in the law may have limited impact. A study of the transitioning economies of Eastern Europe and the former Soviet Union between 1992 and 1998 found that reforms in corporate and bankruptcy laws had little effect on the development of their financial institutions. Improvements began only once their legal institutions became more efficient (11).
The efficiency of courts continues to vary greatly around the world. Enforcing a contract through the courts can take less than 10 months in Singapore, New Zealand and Rwanda but almost four years in Bangladesh and India. And the cost of doing so ranges from less than 10% of the value of the claim in Iceland, Luxembourg and Norway to more than 80% in economies such as Burkina Faso and Zimbabwe. In three economies (Cambodia, Papua New Guinea and Timor-Leste), the cost of resolving a standardized dispute through local courts exceeds the value in dispute, indicating that litigation may not be worth it at all.
1. Esposito, Gianluca, Sergi Lanau and Sebastiaan Pompe. 2014. “Judicial System Reform in Italy: A Key to Growth.” IMF Working Paper 14/32, International Monetary Fund, Washington, DC; Dakolias, Maria.1999. “Court Performance Around the World: A Comparative Perspective. ” World Bank Technical Paper 430, World Bank, Washington, DC; Ball, Gwendolyn G., and Jay P. Kesan. 2010. “Judges, Courts and Economic Development: The Impact of Judicial Human Capital on the Efficiency and Accuracy of the Court System.” Paper presented at the 15th Annual Conference of the International Society for New Institutional Economics, Stanford University, Stanford, CA, June 16–18. Available at http://papers.isnie.org/paper/716.html; Dam, Kenneth W. 2006. “The Judiciary and Economic Development.” John M. Olin Law & Economics Working Paper 287 (Second Series), University of Chicago Law School, Chicago; Rosales-López, Virginia. 2008. “Economics of Court Performance: An Empirical Analysis.” European Journal of Law and Economics 25 (3): 231–51.
2. Dakolias, Maria. 1999. “Court Performance around the World: A Comparative Perspective.” World Bank Technical Paper 430. World Bank, Washington, DC; Sherwood, Robert M., Geoffrey Shepherd and Celso Marcos De Souza. 1994. “Judicial Systems and Economic Performance.” Quarterly Review of Economics and Finance 34 (suppl. 1): 101–16.
3. Dam, Kenneth W. 2006. “The Judiciary and Economic Development.” John M. Olin Law & Economics Working Paper 287 (Second Series), University of Chicago Law School, Chicago.
4. Islam, Roumeen. 2003. “Do More Transparent Governments Govern Better?” Policy Research Working Paper 3077, World Bank, Washington, DC.
5. Esposito, Gianluca, Sergi Lanau and Sebastiaan Pompe. 2014. “Judicial System Reform in Italy: A Key to Growth.” IMF Working Paper 14/32, International Monetary Fund, Washington, DC.
6. World Bank. 2004. World Development Report 2005: A Better Investment Climate for Everyone. New York: Oxford University Press.
7. World Bank. 2004. World Development Report 2005: A Better Investment Climate for Everyone. New York: Oxford University Press.
8. World Bank. 2004. World Development Report 2005: A Better Investment Climate for Everyone. New York: Oxford University Press.
9. Chakraborty, Pavel. 2016. “Judicial Quality and Regional Firm Performance: the Case of Indian States.” Journal of Comparative Economics 44 (4): 902–18.
10. Castelar-Pinheiro, Armando and Celia Cabral. 2001. “Credit Markets in Brazil: The Role of Judicial Enforcement.” In Marco Pagano and Oracio Attansio, Defusing Default: Incentives and Institutions. Inter-American Development Bank. Washington, DC; Sereno, Lourdes Ma, Emmanuel de Dios and Joseph J. Capuano. 2001. “Justice and the Social Cost of Doing Business: The Case of Philippines.” World Bank, Manila, Philippines; Herrero, Alvaro, and Keith Anderson. 2001. “The Cost of Resolving Small Business Conflicts: The Case of Peru.” Inter-American Development Bank, Sustainable Development Department, Best Practices Series. Washington, DC.
11. Pistor, Katharina, Martin Raiser and Stanislaw Gelfer. 2000. “Law and Finance in Transition Economies.” Economics of Transition 8 (2): 325–68.