The World Bank Doing Business Ranking of Quality of Justice: Critical Analysis

Author:Luis Felipe Mohando
Position:LL.M., Associate at Sorainen Law Firm

1. Introduction - 2. The Reports and enforcing contracts: An overview - 3. Puzzling maths: The fewer the procedures, the better the court - 3.1. A thin concept of an ideal court - 3.2. In search of a rationale - 3.3. Having fewer procedures does not mean having faster trials - 4. Forgetting economics: What appears to be cheap justice might be actually costly - 4.1. The bill that the plaintiff... (see full summary)

1. Introduction

Economic theory, econometrics, and game theory have recently shed new light on the study of diverse social phenomena, including the law and the causes of social and economic development. Economic tools have been used in attempts to understand the effect of laws and regulations in the economic development of a given society. If 'good laws' and 'good institutions' somehow 'cause' economic development, it would be worthwhile to try to identify such laws and institutional arrangements, understand how they foster development, and replicate them everywhere.

The World Bank and other international organisations have generated rankings and measures based on these ideas, including those featured in the six Doing Business reports published by the IFC since 2003 (hereinafter 'the Reports'). 2 The Reports focus on business legislation around the world, purporting to objectively measure, compare, and report on the quality of laws and regulations affecting businesses in different countries. 3 Their aim is to identify the world's 'best practices' related to the aspects of business regulation their authors consider relevant for entrepreneurship and to benchmark the regulations of other countries in comparison to such best practices. They measure regulation quality, for example, in the categories 'starting a business', 'hiring and firing workers', 'getting credit', 'registering property', and 'enforcing contracts'. The Baltic States have enjoyed high rankings in the Reports, being among the top 30 in the 'ease of doing business' ranking since its inception in 2006 (when among 155 countries Estonia ranked 16th, Latvia 26th, and Lithuania 15th) through to the latest, 2009 release (where among 181 countries they ranked 22nd, 29th, and 28th, respectively). 4

One of the pillars in the Reports' consideration of the ease of doing business is the measure of 'enforcing contracts', for which Estonia ranks 30th, Latvia fourth, and Lithuania 16th. Its aim is to measure the quality of courts, on the basis of the number of procedures, cost for the plaintiff, and the time it takes to enforce a hypothetical contractual dispute in a given economy. The lower these three figures, the higher the ranking.

But does this mean anything? Does a good place in the rankings mean that the Baltic States have 'better laws' or 'better courts', fostering development better than those of countries with worse ratings? More importantly, does it make sense to reform in order to have a better ranking? Unfortunately, the answer might not be 'yes'. Using simple law and economics theory, this paper seeks to scratch the surface of the 'Enforcing Contracts' section of the Reports, showing that, of the three measures the Reports now employ in relation to contract enforcement, only 'days to enforce' seems theoretically sound and giving some suggestions as to how to complement said measure to more meaningfully reflect efficiency in dispute resolution. Of the three measures - procedures, cost, and time - the first needs more solid theoretical foundations, the second is at odds with economic theory, and the third needs improvement to guide policy.

Section 2 offers a brief overview of the Reports, their background, and the issues addressed in this paper. Section 3 critically analyses the measure of number of procedures, and then Section 4 addresses the measure of costs in the light of economic theory. Section 5 looks at the impact of delay in enforcement and makes suggestions for improvement. Finally, Section 6 offers the author's conclusions.

2. The Reports and enforcing contracts: An overview

The Reports' stated goals are "to advance the World Bank Group's private sector development agenda" by "motivating reforms through country benchmarking", "informing the design of reforms", "enriching international initiatives on development effectiveness", and "informing theory". 5 As these statements and the Reports' titles suggest, the authors - a World Bank team led by economist Simeon Djankov - have a particular view of the effect of the regulatory environment on development. For them, 'law matters' for development, and better (frequently fewer) regulations lead to growth and job creation. 6 Moreover, they very explicitly try to promote legal reform according to their findings, highlighting "top reformers", pointing at "who is not reforming", showing "success stories", and ranking countries according to the "ease of doing business". 7

Intellectually, the Reports are inspired both by the Law and Finance movement started by Rafael La Porta, Florencio López-de-Silanes, Andrei Shleifer, and Robert Vishny, who tried to apply econometric analysis to the study of the law and legal traditions 8 ; and by the ideas of Hernando de Soto, a Peruvian economist who argues that the legal framework could push people toward the informal economy and prevent them from owning property, doing business, and raising themselves and their countries out of poverty. 9 These ideas were the origin of the New Comparative Economics movement and of the Reports. 10 They are also related to the New Institutional Economics school of thought, founded by Douglass North 11 , for which the institutional framework within which the agents of a given economy operate is determinant of the capability of that economy to achieve development. 12

Although cutting red tape seems in principle a good idea and the wealth of data the Doing Business project is gathering is remarkable 13 , both the Reports and their theoretical background have been subject to serious criticisms. 14 Furthermore, because of the impact in the media and the endorsement by the World Bank and other international institutions (most notably, the United States Millennium Challenge Corporation) 15 , the shortcomings of the Reports may be potentially harmful. 16 For some critics, the procedure for testing the Reports' underlying hypotheses has been different from the one normally applied in economic research, which involves the risk of the measurement of institutional performance remaining subject to aprioristic policy recommendations:

The indirect cost of [the Reports] from the adoption of defective policies could therefore be huge, for two reasons. Firstly, the authors of the preliminary research are responsible for the subsequent reports. [Although probably insignificant, there could be a] risk that they will tend to search for or interpret the new information in such a way that it confirms their preconceptions[... Secondly], the fact that an institution as relevant as the World Bank is involved in the project covers up its defects and vouches for its conclusions which, in a normal situation, would be taken as preliminary, having a limited effect on policy. For these two reasons - the incorrect procedure and the participation of the World Bank in the project - there is considerable risk that such preliminary conclusions will be taken as final [determinations] and used for establishing wrong 'best practice' standards and for taking mistaken decisions in institutional reform. 17

In other words, because of the involvement of the World Bank and other international development aid institutions in the crafting of the rankings, and the potential (or effective) conditioning of aid and investment on how well a country scores in those rankings, the indicators have the potential of being very influential. Therefore, such measures have to be designed and tested with the utmost care and, further, have to be methodologically and theoretically sound, to avoid generating widespread implementation of inappropriate reforms or wrongly punishing the right policies. 18 This is particularly important in view of the emphasis the Reports' authors (and, ultimately, the World Bank) place on highlighting the 'good' and 'bad' economies, those that have reformed according to the Reports' metrics or not 19 , on suggesting the use of the Reports to guide reform 20 , and on how 'what gets measured gets done' 21 , suggesting that reforms that do not get measured or do not help the country improve its rankings may be overlooked despite their necessity or convenience.

The 'Enforcing Contracts' chapter focuses on measuring procedural laws and judicial institutions. The authors argue that courts should be "fast, fair and affordable" 22 , and they try to measure these qualities by setting up a hypothetical contractual dispute, examine the procedural laws of the countries surveyed to see how the dispute would be handled, check with local counsel, and use the information to build the measurement indices. 23 The indices were originally four: number of mandatory procedures requiring interaction between the parties and/or the court; cost incurred by the plaintiff; estimated time to resolve the dispute; and a measure that disappeared with the 2005 report, termed procedural complexity. 24 With this information, they rank the surveyed countries, stating that courts in richer countries (which arguably have the most 'efficient' courts) have fewer procedures 25 , are less costly 26 , and take less time to resolve the dispute. 27 In the 2004 report, the authors blame poverty, legal tradition, and procedural complexity as the main causes of court 'inefficiency', and suggest various reforms. 28 The theoretical and methodological...

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