Enforcing Contracts and Doing Business

Enforcing Contracts and Doing Business

Late last August the announcement was made by the World Bank that it had opted to pause its “publication of the Doing Business report” due to, as the Bank explained, “a number of irregularities” that had been reported “to the data” in the 2018 and 2020 reports. While the Doing Business Index (DBI)’s methodology has never been without its fair critique, the move to halt is actually respectable, as it speaks to the levels of motivation to produce a quality index.

In this author’s view, the DBI was never intended to serve as a standalone statistic, but rather was to be employed in other empirical studies. For example, one such study is a 2012 paper by Jamal Ibrahim Haidar, entitled “The impact of business regulatory reforms on economic growth”. Using the collective DBI reform results for 172 countries, Haidar finds that there is “fairly robust evidence of positive impacts of regulatory reforms and these estimated impacts are sizable and plausibly large.” He adds, “Each additional reform … is associated, on average, with a 0.15% increase in economic growth”.

Haidar’s approach, however, was to convert the per-country reforms into a singular “dummy variable”, which applied a one (1) to countries that the DBI overall score showed as having implemented “positive reform during the year” and an indicator of zero (0) otherwise. It, therefore, left open the question as to each indicator’s individual impact. Adrian Corcoran’s and Robert Gillanders’ 2013 paper sought to address this by digging deeper into the sub-indicators of the DBI by analyzing the unique role played by each variable as it pertains to attracting Foreign Direct Investments (FDI). The duo’s empirical research— which employed a sample for 53 countries—found that indeed “better business regulatory environments, as defined by the World Bank’s Ease of Doing Business measure, will attract foreign direct investment”, but that “most of this effect can be explained solely by how easy it is to trade across borders, with the other components of doing business having little or no effect.”

Picking up some five years later and with data for 177 countries, researchers Mohamed Hossain, Zubair Hassan, Sumaiya Shafiq, and Abdul Basit (2018) likewise disaggregated the index in their work entitled “Ease of Doing Business and Its Impact on Inward FDI”. This latter group found that the “Enforcing Private Contracts”, “Paying Taxes”, and “Starting a Business” sub-indicators were all positively associated with increased FDI inflows; thereby, reinforcing the longstanding expectation that reforms in these areas do impact investment levels.

Of course, like many things economic, there are studies that may confirm and others that may deny those findings, and that’s “okay”. The takeaway for this Business Perspective article is that based on available evidence it really cannot hurt to make the relevant changes to the local institutions. At worst, there is the unlikely event that nothing happens; at best, the Belizean economy benefits.

However, it’s even more than that: This is a Business column after all, and having spoken with representatives of the private sector, the on-the-ground fact is that the risk of having slow-in-coming judicial enforcement of private contracts is indeed viewed as being bad for business. Fundamentally, there is no business entity that is in love with the idea of having to wait years for a contractual matter to be settled by the courts. Therefore, someone would be right in saying that we really didn’t need empirical economists to confirm or deny anything; entrepreneurs’ real-time and real-life experiences sufficiently tell the tale. Frankly, improving the speed at which a company can settle a legal matter in the Courts is a big deal.

As a result, it is no surprise that Attorney General Magali Marin Young’s words spoken on the January 5^th Business Perspective Show (BP Show) was so welcome by the private sector. Speaking with BP Show’s hosts Kay Menzies and William Neal, Young explained: “Prime Minister Briceño has committed to restructuring the Judiciary at the Supreme Court level. We will be having specialized jurisdictions. … [including] one that specializes in … commercial matters. … The view of restructuring the Judiciary this way is [with] the belief that with specialization judges are able to become more knowledgeable and experienced in a particular field and that should lead to more efficient processing of court matters and delivery of judgments.”

In short, this type of reform should speed things up.

These types of changes, of course, come with a healthy price tag; therefore, it was important that Young also referenced the Prime Minister’s intention to increase the Judiciary’s budget, which has accounted for less than one percent (specifically 0.84%) of the government’s overall budget. In absolute terms, the 2019/2020 budget, for example, saw $9.05 million in “Recurrent” Expenditure allotted to this branch of government out of the $1.07 billion recurrent budget for that year. However, that wasn’t exactly “new”, because if we would go back roughly two decades to the FY 2001/02, the Judiciary’s recurrent budget then accounted for 0.78% of total expenditures, only 0.6 percentage points less than more contemporary estimates.

Additionally, to be fair, it is worth noting that relatively low budgetary allocations isn’t unique to Belize, as other regional and extra-regional jurisdictions have likewise been known to apportion less than one percent of their overall recurrent expenditures to this arm of government.

The question, therefore, is how much of an increase in funding is needed and how much can actually be realized given these economic depressing times? The new administration’s manifesto had pledged to increase funding to the Judiciary by 2%. To put that into perspective, that would move the recurrent allocation from about 0.84% to 0.86%. In absolute terms, if the latter figure was used for FY 2019/20, this would have been about $9.2 billion, roughly $150,000 more. Is this increase sufficient? That’s for the courts to say, but from our view, it’s a welcome start, especially when coupled with the move towards more electronic governance and operations at the courts.

As was said above, the time it takes to enforce private, commercial contracts is an important consideration when it comes to boosting investor confidence. And as the empirical works cited above have found, this, in turn, does have impacts on investment and overall economic growth. Therefore, the private sector welcomes these impending reforms, and we look forward to seeing the results as well as hopefully the continued work over the next few years aimed at augmenting the Judiciary’s efficiency.