Improving the efficiency of courts can boost a country’s economic growth

Institutions play an important role in economic growth. The efficiency of institutions such as judicial systems varies across countries and may explain the differences in growth rates and per capita income (Acemoglu et al., 2005).  A well-functioning court system eases the establishment of new commercial relations, lowers barriers to entry and enables new markets’ creation, ultimately promoting development (Weber, 1905). In contrast, operational inefficiencies in courts undermine economic growth, weakening their capability to safeguard the enforcement of private contracts and the security of property rights. 

The measure most commonly used to benchmark judicial efficiency is the time it takes to resolve a typical dispute, since it is easily measurable and stable over time. Significant shifts in judicial performance typically result from systemic reforms, such as changes to legal frameworks, organizational restructuring of the judiciary, or shifts in general litigation practices.

Using judicial timeliness as a measure of court efficiency, we find that a country going from the 75^th percentile to the 50^th percentile in global court efficiency will see an increase of 0.28 percentage points in its annual GDP per capita growth, all else equal (i.e., holding income per capita, human capital, prevailing culture and religion constant). A quarter of a percentage point in annual economic growth may seem like a small improvement. To make it more concrete, if Portugal (currently at the 75^th percentile) brought its resolution times in line with those of the Netherlands (50^th percentile), it could boost its national income by $840 million (on top of its current annual GDP of roughly $300 billion).

Judges often argue that timeliness is not a good proxy of efficiency, as a trade-off exists between efficiency and quality in the delivery of justice, i.e. respecting procedural hurdles and other physical constraints maybe necessary to ensure quality but may slow down the work of courts. However, empirical evidence shows no relationship between judicial timeliness and a country’s quality of justice (Bray et al., 2016; Coviello et al., 2019). More often, instead, in periods of greater demand the quality of judicial services becomes higher – perhaps because more scrutiny is given to the work of judges when the workload is bigger (Melcarne et al., 2021).

The benefits of increasing court efficiency do not end with growth (Bosio, 2023). First, previous studies suggest that courts are especially relevant in countries with high growth, low human capital and complex legal procedures. In economies with greater product sophistication and higher per capita income, economic transactions increasingly involve numerous business partners, replacing repeated dealings where reputation alone deters opportunistic behavior. As economies transition to such \”one-shot\” interactions, effective \”third-party\” enforcement becomes essential to reduce transaction costs (North, 1990; Johnson et al., 2002). Moreover, jurisdictions with complex legal procedures often reflect low societal trust, making judicial institutions indispensable yet more burdensome to use (Aghion et al., 2010).

Second, courts act as an important deterrent against economic agents’ interest to deviate from previously signed contracts (Williamson, 1985). And conversely, a flawed institutional mechanism devoted to enforcing the law might make such deviations more attractive, as the discounted value of future monetary (and sometimes non-monetary) punishments will necessarily drop. Such opportunism undermines economic transactions, as firms become unwilling to trust partners and offer trade credit in their business transactions, due to the diminished likelihood of this credit getting repaid.

Third, weak law enforcement encourages opportunistic behavior. Borrowers, for example, may be more likely to default knowing the challenges creditors face in recovering loans. This creates a vicious cycle, as creditors, anticipating such behavior, reduce the availability of credit. Firms’ employment decisions and overall market dynamics may also be influenced by the opportunism fostered by poor judicial performance.

Finally, a new macroeconomic literature (for example, Becker and Ivashina, 2021) shows that the efficiency of courts in times of financial crises determines the speed with which economies overcome such crises. The association goes through the fast resolution of cases around financially distressed firms. Such cases involve different aspects of the law: insolvency, contract renegotiation, labor and international commercial law.

In conclusion, strengthening judicial efficiency is not merely a technical improvement but a cornerstone for fostering trust, enhancing market dynamics, and unlocking sustained economic growth. By addressing inefficiencies in the judicial system, countries can create a virtuous cycle of increased credit availability, innovation, and investment, ultimately driving prosperity and reducing barriers to development.

Source: blogs.worldbank.org