• 25 Jan 21
  • Posted by Rao, Manaswini

Investing in courts to build state capacity for development

While the standard toolkit for making progress on social and economic goals includes policies made by the executive and laws passed by the legislature, comparatively little attention has been paid to the role of the judiciary. This column highlights the relationship between the judiciary and development outcomes, reviewing research evidence and presenting potential ways to invest in courts to build state capacity for development.

Courts have typically played a central role at critical inflection points in any democracy’s trajectory by interpreting the constitution, statutes, and policies in relation to evolving social, economic, and political contexts. While this can put the courts at odds with those currently in government, a strong judiciary lends legitimacy to state institutions in the long run.

Many Supreme Court and High Court judgements shape the way an economy functions by complementing the role of statutes and policies. For example, the decision in the case of Azad Rickshaw Pullers Union v. Punjab, 1980 by the Supreme Court of India circumvented the potential unemployment of many low-income rickshaw-pullers who, under a new state law, had to own rickshaws instead of the hitherto rental approach to obtaining licenses to ply.

The decision provided a new scheme to convert rickshaw renters into owners by increasing their access to bank loans. This would address the issue of employment as well as preserving the objective behind the law of preventing exploitative practices in the existing rental market.

In addition to the importance of such judgements by Supreme Courts and High Courts, which set precedents for other lower courts to follow, the functioning of ordinary trial courts at sub-national level matters for the day-to-day functioning of society.

For example, property litigation concerning land ownership disputes and debt recovery disputes form the bulk of civil litigation at this level. Timely resolution of such disputes generates trust in contracts and protects property rights.

Concerns about trial court capacity is not only warranted in developing economies but also in OECD countries such as Italy and Greece where the state of backlogs in courts and time to trial resolution display a worrying pattern with respect to per capita GDP (see Figure 1). But little has been examined about this empirically, in order to identify which factors inhibit trial court capacity and the returns on investments in capacity improvements to inform policy.

Figure 1: Correlation between GDP per capita and resolution time in trial courts

Early research in this area examines historical judicial institutions in explaining the efficiency of modern courts using aggregate data. This work highlights the role played by procedural formalism influenced by whether English common law or French civil law served as the historical base for modern practice.

Later research, including my own, has demonstrated that court congestion in the form of a mounting backlog of litigation significantly affects development outcomes through credit markets, firm performance, and supply-chain linkages.

Court congestion and subsequent delays in trial resolution can be caused by several factors. First, trial courts adjudicate disputes across multiple issues, spanning property disputes to debt recovery to divorce petitions.

One solution could be specialized courts, such as debt-recovery or bankruptcy courts. Indeed, one study finds that such specialized debt recovery tribunals help to speed up bank loan repayment in India. This subsequently improves credit market outcomes in terms of greater loan circulation at lower interest rates.

Second, congestion can be caused by inadequate staffing and/or the varying extent of territorial jurisdiction. One study shows that district courts with jurisdiction over a greater number of municipalities in Brazil are more severely congested, which affects their ability to enforce bankruptcy reforms.

A more common cause of congestion is judge vacancies, which is ubiquitous across many developing countries. One of my studies makes use of the quasi-random nature of such vacancies occurring over time within district courts in India to establish its causal relationship to the speed of backlog resolution. Figure 2 shows this relationship, implying that reducing judge vacancies has an immediate and persistent effect in increasing backlog resolution.

Judge vacancies during the life cycle of a litigation process affect the plaintiffs more than the defendants. This is likely to have distributional consequences, particularly when plaintiffs tend to have fewer assets relative to defendants, as Figure 3 shows.

Furthermore, as Figure 4 shows, these capacity constraints in judicial staffing also affect the enforcement of subsequent bankruptcy reforms in India (similar to the Brazilian context), which in turn affects the potential misallocation of credit in such jurisdictions.

 

Figure 2: Relationship between judge strength and trial resolution rate

 

Figure 3: Firms with lowest assets are more likely to use trial courts for justice as plaintiff whereas respondents are more likely to be richer firms.

 

Figure 4: Left graph shows a reduction in lending to defaulting borrowers and right graph shows that in addition to reduction in lending to defaulting borrowers, lending to clean borrowers increase in districts with better judge strength.

Third, effective case-flow management practices to streamline the life cycle of litigation can alleviate congestion. In the context of civil and commercial courts in Dakar, Senegal, research finds that setting strict timelines for different stages of the litigation processes significantly reduces the time to resolution.

But over time these effects from supply-side policies may be short-lived if demand for litigation responds to an increase in capacity over the long run. A recent study finds that plaintiffs are overconfident about their likelihood of victory in the context of Mexican labor courts, and they continue to file petitions instead of opting for out-of-court settlements. The researchers show that this behavior can be corrected significantly by providing adequate information at the time of filing.

While regulatory hurdles have received attention as barriers to economic growth through Doing Business rankings and other initiatives, state capacity concerns focused on the judiciary have typically escaped prominence. They require attention as one of the top issues on the policy reform agenda.

Even without incurring significant public spending to address the constraints of the judiciary, simple reforms such as fixing vacancies, attracting high quality talent, and reducing incentives for litigants to delay cases could be low cost yet high return investments.

The current state of research in this area is only scratching the surface. We need a lot more empirical evidence and policy-research partnerships examining the judiciary to produce generalizable knowledge of the kind that has been produced for development in education and health.

 

Author:

Manaswini Rao is an applied economist with interests in development economics, economics of institutions, corporate finance, and organizational economics. She is currently a Postdoctoral Scholar (Program on Indian Economy) at the Department of Economics, University of California at San Diego.