There are many reasons why potentially-rich Latin American nations are growing at a slower pace than their Asian counterparts but one of the least noticed factors — and one in need of urgent attention — is that a Latin American may grow old before being able to enforce a business contract in many countries of the region.
A new study by the World Bank and the International Financial Corporation, entitled Doing Business 2014, provides a ranking of the world’s countries with the most cumbersome litigation systems. It shows that it’s easier to enforce a contract between two domestic private businesses in Communist China or corruption-ridden Russia than in Brazil, Mexico, Colombia, Argentina and virtually any other Latin American country.
And judging from what its authors told me last week, that’s one of the key reasons why many Latin Americans refrain from doing business, or why they choose to do business in the underground economy. Court proceedings in commercial disputes are so lengthy, complicated and costly, that they discourage business, they said.
Consider some of the findings hidden in the back pages of the study, which compares business conditions in 189 countries around the world:
• When it comes to ease of enforcing contracts, the survey ranks Russia as number 10, China 19, Argentina 57, Chile 64, Mexico 71, Venezuela 92, Ecuador 99, Peru and Uruguay 105, Panama 127, Brazil 121, Colombia 155 and Honduras 182.
• The average time it takes to enforce a contract is 270 days in Russia, 406 days in China, 426 days in Peru, 480 days in Chile, 590 days in Argentina, 610 days in Venezuela, 725 days in Uruguay, 731 days in Brazil, 1,288 days in Colombia, and 1,402 days in Guatemala. The exception to the rule is Mexico, where it takes 400 days, it says.
• The average legal fees to enforce a contract amount to 11 percent of the contract’s total value in China, 13 percent in Russia, 16 percent in Brazil, 20 percent in Argentina, 29 percent in Chile, 31 percent in Mexico, 36 percent in Peru, 44 percent in Venezuela, 48 percent in Colombia, and 50 percent in Panama.
Augusto Lopez-Claros, the report’s leading author, told me that there’s no question that archaic judicial systems where lawsuits drag on for years tend to slow down economic growth.
If you are suing a supplier for not delivering goods that you have already paid for, your money is tied up and cannot be used for other purposes. “In countries where it takes a long time to litigate, entrepreneurs will think it over twice before signing a new deal,” he said.
Likewise, the higher the legal fees in a country, the more discouraged people are from starting new business partnerships, he added.
Comparatively, many rapidly-growing Asian countries have reshuffled their legal systems to speed up the enforcement of contracts.
In Singapore and South Korea, once chaotic and corruption-ridden countries, it only takes an average of 150 and 230 days, respectively, to enforce a contract, according to the report. In the United States, it takes an average of 370 days, it says.
Jean Michel Lobet, another of the report’s authors, told me that Asian countries such as Malaysia are creating groups of judges who are highly specialized in commercial litigation and can thus do their jobs faster and better.
South Korea also has sped up litigation considerably by creating e-courts, where lawsuits are filed electronically. Virtually all court procedures can be done online 24 hours a day, 7 days a week.
South Korea launched its electronic case filing system in 2010, and about half of its civil cases are currently e-filed, saving a lot of time and money, Lobet said. By conducting litigation electronically, South Korea uses less paper, eliminates the need for storage space, and — most importantly — makes it easier to access documents, he said.
My opinion: The cost and length of settling commercial disputes is not only slowing down economic growth in Latin America, but is also pushing millions of entrepreneurs into the shadow economy.
It’s no coincidence that 56 percent of Latin America’s people work in the underground economy and don’t pay taxes, according to Inter-American Bank figures. If a contract can’t be enforced, why bother signing one?
Perhaps several Latin American leaders should send their justice ministers to visit Singapore, South Korea and Malaysia, and see what these countries have done lately to shorten their commercial litigation backlogs.