OVER the years, economic and policy experts have identified many factors preventing Pakistan’s economy from taking off. The quest to become an Asian Tiger has been thwarted by the usual suspects: corruption, bad governance, inconsistent policies, lack of exports, and the FBR’s lacklustre performance in broadening the tax base.
Yet, there is more to this conundrum than meets the eye. One of the leading causes of Pakistan’s poor economic indicators must be attributed to an underperforming judicial system, where expeditious dispute resolution remains elusive, with parties stuck in judicial proceedings for years with no end in sight.
For economic development, foreign direct investment is majorly responsible for mobilising a country’s economy, bringing in technology, expanding the share of value-added exports, and creating employment opportunities. However, net FDI inflows to Pakistan, as per a report in this paper, averaged about $2.3 billion in the last four years. The figure stagnated recently and plummeted by 38 per cent in the last fiscal year.
This lack of FDI inflows can be attributed to our inefficient judicial system. The World Bank’s Doing Business report (2019) ranked Pakistan 156 out of 190 economies on the ‘enforcing contracts’ indicator, based on the cost and quality of judicial processes and time. The report noted that as of 2019, the resolution of a commercial dispute in Pakistan took 1,072 days on average, compared to 164 days in Singapore, 216 in New Zealand, and 437 days in the UK.
An inefficient judicial system hampers investment.
This data needs to be put in perspective: out of 190 countries dotting the globe, 156 have a better and more efficient judicial system than Pakistan’s. Therefore, when multinational companies and corporations search for potential investment destinations, Pakistan does not feature on the list because of the poor record of its courts to adjudicate on litigation matters. At the minimum, the situation calls for policy interventions from within the judiciary as well as the government, yet the matter is always put on the back-burner.
The ‘enforcing contracts’ indicator is also relevant as the process of investment usually involves the signing and execution of contracts. Contracts not only state the obligations binding on both parties, they also govern what happens in the event of default. In such complex transactions, disputes are inevitable. However, if foreign investors know beforehand that it takes years for disputes to be resolved, they would avoid investing in that jurisdiction altogether.
In this regard, there are two main types of commercial disputes. The first has to do with a party’s title to the subject property, and the second concerns the obligations contained in the contract itself. The first type of commercial dispute, pertaining to defective land titles, is one of the most common kinds of litigation that continues to engulf courts in Pakistan. For instance, if a foreign investor decides to invest in Pakistan, given the issues plaguing the country’s land records, it is possible that the title of the piece of land which the investors have bought for setting up their business/factory might be disputed. Title disputes end up in court and go through various appeal and review forums, which take years to hand out a decisive decree, cementing the title in favour of one party or the other. Such inordinate delays are a nightmare scenario for investors.
For the second type of commercial disputes, the story is no different. Whether it is a shareholder who has been robbed of his shares, or a bank looking to enforce its claim regarding a defaulting borrower, disputes may take up to eight years before they are resolved. This deters not only foreign investors, but also small businessmen who banks may view with suspicion while handing out loans, owing to the arduous litigation process mentioned.
To say the least, the effectiveness of the judicial system and dispute resolution mechanisms in a country have a direct bearing on the quantum of investment received. According to OECD, countries can take deliberate steps to reduce the length of a civil/commercial trial. Factors associated with shorter trial length include larger shares of the budget being devoted to court computerisation, active court management of cases’ progress, systematic production of statistics at the court level, and the existence of specialised commercial courts.
Other than the establishment of separate commercial courts and an increasing emphasis on alternative dispute resolution, the performance on all other counts has been dismal. A concerted effort is required by all stakeholders including lawyers, judges, bar councils, the executive and legislature to defeat the lethargy and red tape that plague Pakistan’s judicial system.
Aman Rehan is a Karachi-based lawyer. Muhammad Usman is a Lahore-based lawyer. They are the alumni of the Shaikh Ahmad Hassan School of Law, Lums.
Published in Dawn, September 6th, 2021
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