Red tape and legal systems

Posted on November 23, 2006 by Nicholas Gruen
Posted in Economics and public policy

Contract enforcement.gif
A journalist from the AFR rang me today to ask me to comment on a recent report by the World Bank and PWC which is a comparative study on the payment of tax by companies. It's an interesting report but it's conducted with such heroic simplifications that one sometimes wonders if it's worth it. For instance there's an assumption that the incidence of taxes companies pay falls on them with payroll tax, when a fair bit of it if not most is more likely to fall on workers.

I was more interested in the stuff on the ease of payment of tax - ie red tape. Even here the assumptions are heroic - namely that the number of pages in the 'primary' tax act is a worthy indicator. Well maybe, but maybe it's just an indicator, but not a very good one.

Anyway, I ran my hypothesis that European civil law systems are much more efficient than those with British origin over some of the data and some of it is suggestive that the hypothesis is right. And some isn't. For instance the length of the tax code in France and Germany is very short (by comparison - a few thousand pages), whereas some of the worst offenders who have double and triple this are from the Anglosphere.

There's also a striking table above, and here illustrating something that's not surprising and pretty well known. One of the things that rich countries have is public institutions which - at least comparatively speaking - work.

I went hunting further into the data which you can find by following the link rather than the table, and as they say, if you torture it long enough, eventually the data will confess. I looked at the data making up this table for differences within developed countries on the quality of enforcement of contracts. When I looked at the time it took, no pattern of note emerged - or rather a pattern that looked to casual inspection to be the opposite of what I'd expected with quite a few anglosphere countries doing relatively well (though even here the amount of time taken to enforce a contract strikes me as pretty outrageously long).

If I'm to keep my hypothesis in the running I have to assume that, though their court system works better, they don't fund it well enough to reduce delays. The English speaking countries seem to proceed faster in legal matters - which is a pretty important aspect of efficiency. When I ranked them by estimated cost of enforcing a contract as a proportion of the cost of the contract, I heard a yell of pain and then . . . voila - my data confessed. Over the fold is the table - but the story is that the most efficient countries are mostly European and rich Asian ones. No English speaking ones in there at all.

Well, that's not quite true there is one tiny exception - which is very odd. The very litigious USA is very efficient by this measure. Perhaps it's contingency fees, and/or a kind of perverse result that emerges from people trying to avoid court. Very odd. But it's an interesting table - over the fold. But before you click - here's a tip. Don't try enforcing a contract in Siera Leone. If you win, you'll probably get killed. If you don't you'll spend more on your lawyer than you'll get back from the court.

Enforcing Contracts      
Region or Economy Procedures (number) Time (days) Cost (% of debt)
Korea 29 230 5.5
Sweden 19 208 5.9
Finland 27 228 5.9
Iceland 14 352 5.9
Denmark 15 190 6.5
United States 17 300 7.7
Lithuania 24 166 8.6
Norway 14 277 9
Austria 23 342 9
Japan 20 242 9.5
Belgium 27 328 9.5
Hungary 21 335 9.6
Gabon 32 880 9.8
Croatia 22 561 10
Poland 41 980 10
Tajikistan 46 257 10.3
Algeria 49 397 10.3
Yemen 37 360 10.5
Germany 30 394 10.5
Bolivia 47 591 10.5
Lesotho 58 695 10.6
Antigua and Barbuda 48 297 10.7
Romania 43 335 10.7
New Zealand 28 109 10.9
Switzerland 22 215 11
Angola 47 1,011 11.2
Kazakhstan 37 183 11.5
Estonia 25 275 11.5
South Africa 26 600 11.5
Latvia 21 240 11.8
France 21 331 11.8
Kyrgyz Republic 44 140 12
Canada 17 346 12
Iran 23 520 12
Serbia 33 635 12.7
Greece 22 730 12.7
Australia 19 181 12.8
Oman 41 598 12.9
Ghana 29 552 13
Seychelles 29 720 13
Kuwait 52 390 13.3
Russia 31 178 13.5
Uzbekistan 35 195 13.5
Armenia 24 185 14
Bulgaria 34 440 14
Czech Republic 21 820 14.1
Hong Kong, China 16 211 14.2
Portugal 24 495 14.5
Equatorial Guinea 38 553 14.5
Singapore 29 120 14.6
Ethiopia 30 690 14.8
Cape Verde 40 465 15
Argentina 33 520 15
Montenegro 49 545 15
El Salvador 41 626 15
Slovenia 25 1,350 15.2
Samoa 30 455 15.3
Ecuador 41 498 15.3
Iraq 65 520 15.3
Brazil 42 616 15.5
Spain 23 515 15.7
Slovakia 27 565 15.7
Mauritius 37 630 15.7
Netherlands 22 408 15.9
Uruguay 39 655 15.9
Suriname 29 1,290 15.9
Ukraine 28 183 16
Philippines 25 600 16
Puerto Rico 43 620 16.1
Moldova 37 310 16.2
Jordan 43 342 16.2
Maldives 28 665 16.2
Chile 33 480 16.3
Morocco 42 615 16.5
Taiwan, China 28 510 16.6
United Kingdom 19 229 16.8
St. Kitts and Nevis 49 578 17.1
Tunisia 21 481 17.3
Turkey 34 420 17.4
Thailand 26 425 17.5
Mongolia 29 314 17.6
Italy 40 1,210 17.6
Mauritania 40 400 17.9
Belize 51 892 18
Egypt 55 1,010 18.4
United Arab Emirates 34 607 18.5
Eritrea 35 305 18.6
Costa Rica 34 615 18.7
Bosnia and Herzegovina 36 595 19.6
Azerbaijan 27 267 19.8
Saudi Arabia 44 360 20
Mexico 37 415 20
Colombia 37 1,346 20
Swaziland 31 972 20.1
Bhutan 34 275 20.2
West Bank and Gaza 26 700 20.2
Georgia 24 285 20.5
Sudan 67 770 20.6
Ireland 18 217 21.1
Belarus 28 225 21.1
Malaysia 31 450 21.3
Sri Lanka 20 837 21.3
Nicaragua 20 486 21.8
Syria 47 872 21.9
Grenada 50 583 22.1
Israel 31 585 22.1
St. Vincent and the Grenadines 52 394 22.2
Albania 39 390 22.6
Pakistan 55 880 22.6
Madagascar 29 591 22.8
Senegal 33 780 23.8
Guyana 30 661 24.2
Togo 37 535 24.3
Nepal 28 590 24.4
Botswana 26 501 24.8
Afghanistan .. 1,642 25
Marshall Islands 34 432 26.5
Guatemala 36 1,459 26.5
China 31 292 26.8
Zimbabwe 33 410 26.9
Nigeria 23 457 27
Guinea-Bissau 40 1,140 27
Djibouti 59 1,225 27
Jamaica 18 415 27.8
Lebanon 39 721 27.8
Dominica 52 681 28.2
Namibia 31 270 28.3
Zambia 21 404 28.7
Venezuela 41 435 28.7
Comoros 60 721 29.4
C ´te d'Ivoire 25 525 29.5
Benin 49 720 29.7
Lao PDR 53 443 30.3
Honduras 36 480 30.4
Trinidad and Tobago 37 1,340 30.5
Vietnam 37 295 31
St. Lucia 51 635 31.2
Burundi 47 403 32.5
Haiti 35 368 32.6
Macedonia, FYR 27 385 32.8
Palau 43 622 33.2
Peru 35 300 34.7
Dominican Republic 29 460 35
Uganda 19 484 35.2
India 56 1,420 35.7
Gambia 26 247 35.9
Cameroon 58 800 36.4
Paraguay 46 478 39.8
Kenya 25 360 41.3
Niger 33 360 42
Rwanda 27 310 43.2
Central African Republic 45 660 43.7
Guinea 44 276 43.8
Mali 28 860 45
Congo, Rep. 47 560 45.6
Bangladesh 50 1,442 45.7
Tonga 30 510 47
Panama 45 686 50
Tanzania 21 393 51.5
Chad 52 743 54.9
Fiji 26 397 62.1
Vanuatu 24 430 64
S £o Tom © and Principe 67 405 69.5
Solomon Islands 25 455 69.8
Kiribati 26 660 71
Micronesia 25 775 77
Burkina Faso 41 446 95.4
Papua New Guinea 22 440 110.3
Cambodia 31 401 121.3
Indonesia 34 570 126.5
Mozambique 38 1,010 132.1
Malawi 40 337 136.5
Congo, Dem. Rep. 51 685 156.8
Timor-Leste 69 1,170 183.1
Sierra Leone 58 515 227.3

9 Comments

  1. SJ
    November 23, 2006

    Nicholas, I don't find the data persuasive as to your efficiency hypothesis.

    I could posit an alternative hypothesis, that legal costs are fixed across countries. Your ranking fits my hypothesis, too. Which kinda indicates there's something lacking in both hypotheses.

  2. Nicholas Gruen
    November 23, 2006

    Thanks for the comment SJ, but I can't really understand the point you're making. Can you expand a little.

  3. SJ
    November 23, 2006

    No worries.

    Let's say that the cost of pursuing a debt is $100. In rich countries, it turns out that $100 is small compared to the size of the debt. In poor countries, $100 is large compared to the size of the debt.

    Note that I'm not claiming that my hypothesis true.

    I guess what I'm trying to say is that you've found a correlation between two factors, but you haven't really given a convincing argument as to the causal relationship between the two.

  4. Getachew
    November 23, 2006

    Sir/Ms Your publication including the analysis is not far from facts. But, where do you catagorize those States known for their "AIDS package" ? and not loan or technical assistance Program under UN ambrela? warm regards, GBZ

  5. Nicholas Gruen
    November 23, 2006

    I think the correlation is reasonable, but I've not subjected it to proper analysis. I'm basically ignoring the less developed countries as I expect a bunch of other factors will be relevant. But amongst the developed countries, there's a whole bunch of European and rich Asian countries up the top, and then a bunch of English speaking countries. But I'm not making too much of it because

    1) The US is an exception (Though I'll make use of your suggestion that perhaps it has bigger cases on average which accounts for at least some of it's good rating.)
    2) If you look at time of cases, as I've said, what patten there is seems to go the other way.

  6. Patrick
    November 24, 2006

    Overwhelmingly, major international trade flows through Anglo systems and Amsterdam. The ME's legal system is basically the Chancery division of the High Court (their Supreme Court) of London with a bit of help from New York, the Caymans and Bermuda.

    So that is important.

    Also, I may be being presumptous, but looking at two of my favorite countries (for comparative purposes) France and Australia, the percentage of the debt in France is 11.8 as against our 12.8 but the length of time is 331 against our 181. Would not that 150 days easily cancel out the 1 percent of the debt? if interest is more than 2.2 percent, at least it would, or so it seems to me very quickly in the morning.

  7. Patrick
    November 24, 2006

    PS I agree that the assumptions are heroic to the point where discretion might have been the better part of valour. Number of pages, to start with, is surely a heroic to the point of useless measure of anything except the likelihood of RSI amongst practitioners.

  8. Nicholas Gruen
    November 24, 2006

    Yes, I caught myself wondering whether they'd counted the number of words for instance! Maybe the methodology isn't that shallow. But then maybe it is!

  9. skepticlawyer
    November 25, 2006

    Am a fan of continency fees. Not only do they improve efficiency, but they also improve access to justice.