Enforcing Contracts…Slowly

If your sole concern in deciding where to do business is how quickly legal actions proceed and at what cost, the best country for you to invest in is Luxembourg, which ranks at number 1 for enforcing contracts.
Luxembourg, of course, doesn’t have warm tropical weather, the second largest barrier reef in the world, or archaeological wonders representing the ancient Maya civilization.

Investors consider many other factors when deciding where they will put their money, so the World Bank’s Doing Business report does not overall rank Luxembourg as the Number One country in which to do business. In fact, between 2013 and 2014 its overall ranking dropped 4 places, from 56 to 60 out of 189 economies. Previously, this column looked at New Zealand as the top country for ease of starting a business. Luxembourg, by contrast, ranks at 103 for that particular category. But before you set out to mock them, remember that we rank overall at 106 to their 60.

Why discuss Luxembourg? When we want to perform well at a sport, we should look at the best tactics. One player might have defensive tactics we wish to emulate, but may not be good at offense. As we go through the various rankings, we’ll look at the top countries in each category, to see what gets them to the top. After all, we shouldn’t aspire to be second best.
Belize, we will all agree, has some work to do in order to make it easier for us to do business and thereby grow the economy. The Doing Business report is a worldwide scorecard that compares and ranks economies as even-handedly as possible on several topics of concern when doing business.

No, this is not the investor’s final decision guide; each investor has his or her own very specific criteria for investing. However, this is a highly credible report and these issues are common to most investors, whether local or foreign, so the report is widely consulted. Of course, the point is that the higher a country ranks, the easier it supposedly is to do business there. Doing Business is, if you will, the Trip Advisor for the serious investor.
Returning to the matter of how easy it is to enforce a contract, Doing Business collected data based on a sample claim, the value of which equals 200% of the relevant economy’s per capita income. The dispute is between two business regarding quality of goods delivered, and the case is eventually decided in favour of the seller. The case then moves through enforcement and collection.

Belize’s ranking of 173 out of 189 suggests that our process is not at all easy. In fact, the case mentioned would, on average, take 892 days to carry out 51 procedures, and would cost approximately 27.5% of the claim’s value. By comparison, the same case in Luxembourg’s system would take 321 days to proceed through 26 procedures, at a cost of 9.7% of the claim value.

This is a fairly straightforward assessment of the situation; some investors may have had better experiences and some worse. However, the 892 days and number of procedures set a reference point from which we can gauge the need for improvement. Very few small businesses can afford to absorb the costs involved in waiting two and a half years for a judgment and enforcement of collection. These costs include not just the legal fees but also the taxes already paid on the sale of the goods, and the cost of financing those goods while awaiting payment.

Businesses are therefore less willing to take on the risk of extending credit, which in turn slows down growth.
While no individual invests in a business solely because settling a contract is relatively easy, every responsible investor has to assess risk.

The longer it takes creditors to resolve legal action in a country, the higher the risk to the financial health of their businesses. If we as a country wish to encourage investment of any kind, it helps considerably to minimize risk in the ways we can control.

Comments are closed.