Doing Business index: Improving Bangladesh's ranking

If you have a commercial dispute in which your claim is Tk 1 crore and you have decided to go for legal action, if successful, you can hope to recover around Tk 33.2 lakh, and in other words, the cost of recovery is estimated at 66.8 percent of the claim.

In all likelihood, the case will take 1,442 days or just 18 days short of four years to be resolved. This is what The World Bank's Doing Business Index 2017 says.

Indeed it is numbers like these that reinforce negative perceptions about Bangladesh. Before I go on to explaining what factors affect our ranking, it would be useful to introduce BIAC.

At Bangladesh International Arbitration Centre (BIAC), we have been making an effort to bring about a major change in the way we settle commercial disputes.

BIAC's objective is to embed settlement of commercial disputes through alternate dispute resolution (ADR) as the first default process, instead of taking it to the court.

This may sound very simple and logical, but the reality, for a variety of complex reasons, is quite different.

I know, the first thing that crops up in our minds is that we are as a people, fond of taking our disputes to the court, but the truth is our history and culture say otherwise.

Traditionally, our villages and towns had a heritage of “shalishi” - an alternative dispute resolution process which had elements of both mediation and arbitration.

Although elements of it still exist in different forms in our rural and urban areas, the rise of new socio-cultural ethos and stronger and a more structured legal eco system that was established during the British colonial period has eroded and disempowered the social authority of this quasi legal process.

The quantum increase of contractual relationships and transactions and the consequent impact of increasing number of disputes have put enormous strain on our commercial legal system.

The legacy of a public sector dominated economy till the mid to late eighties limited the commercial legal precedence and practice of commercial jurisprudence in Bangladesh.

In such a situation, the conventional response of increasing capacity of the legal resources of the state to meet the need does not make economic sense and would be an unsustainable financial burden on the state.

Economists consider that this increases the economic transaction cost and therefore lowers the efficiency of the economy. 

Institutions that facilitate low transaction costs boost economic growth. Douglass North states that there are four factors that comprise transaction costs – 'measurement', 'enforcement', 'ideological attitudes and perceptions', and 'the size of the market'.

Measurement refers to the calculation of the value of all aspects of the goods or services involved in the transaction. Enforcement can be defined as the need for an unbiased third party to ensure that neither party involved in the transaction reneges on their part of the deal.

It is the legal system that ensures 'enforcement'. However, if enforcement takes longer than what is an acceptable period, on time value of money calculation, the end result is that the discounted value of the 'enforcement' is unviable, nil or negative.

To make this point, let me cite some available statistics.

A study conducted by International Finance Corporation, Bangladesh Investment Climate Fund, and the Centre for Effective Dispute Resolution (CEDR) (UK) 2009 came up with the following findings, which I believe are still relevant.

Civil (appeal & revision) cases: 15.3 years

Writ cases: 3.68 years

Civil cases (original jurisdiction): 5.78 years

The situation in case of outstanding litigation under the Money Loans Court Act (2003) is not encouraging either. 

Bangladesh Bank: Number of cases pending with Artha Rin Adalat was 49,656 until 2016 (amount Tk 60,142 crore).

Clearly the above numbers do reinforce the view that 'enforcement' is at best weak and at worst barely existent. This also feeds into the 'ideological attitudes and perceptions' part of the 'transaction cost' equation.

Issues like these have a much larger knock-on effect than one perceives.

Take the case of a global ranking published every year by different agencies on aspects of economics of different countries.

The 'Doing Business Index' of the World Bank ranks Bangladesh at 176th among 190 countries trailing Sri Lanka (110), India (130) and Pakistan (144). It may surprise many to find that war torn economies like Iraq (165) and Syria (173) fared better than us.

This is the point I was trying to make in the opening few lines on how qualitative rankings can exacerbate negative perceptions about the country. We certainly need to address this to help create a positive image of Bangladesh as a country which welcomes foreign direct investment.

This composite index has 10 underlying factors e.g. starting business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.

We are in the last 10 of the 190 countries in three factors, in the last 50 in seven (including the three) factors and in the first 100 in only one.

To improve this ranking, we need to look at the ones that are pulling us down the most.

The three that stand out are Getting Electricity ranking 187, Registering Property ranking 185 and Enforcing Contracts 189 all out 190 countries.

We are among the last five countries in these three. While the first two of these three appear to be 'work-in-progress' for the government; the last one is the most challenging one and one that perhaps requires a quantum change in attitude towards the alternative dispute resolution process.

We cannot resolve the huge backlog of cases by simply increasing the number of courts or judges. The cost could be astronomical.

Most economies have faced this issue of backlog of cases and most have resolved it by making the legal infrastructure ADR friendly and more importantly, forcing litigants into the ADR track.

The latest example is Malaysia that brought down the index ranking by lowering the average number of days it takes to enforce a contract to 425 in 2012 from 585 in 2011 by forcing litigants to use ADR rather than trying to resolve all outstanding cases through the judicial process.

Malaysia moved from 102 out of 183 economies to 23 out of 190 economies in 2011 and 2017, respectively. This upward ranking was to a great extent assisted by their improvement in “Enforcement of Contract” ranking through adoption of an ADR-friendly regime.

Forcing cases on the ADR track freed the courts to concentrate on the more important and impactful litigation, lowered transaction cost and created a more efficient economy.

BIAC was set up by three leading trade bodies – the International Chamber of Commerce, Dhaka; Chamber of Commerce & Industry; and the Metropolitan Chamber of Commerce & Industry. This not-for-profit institution, like similar ones in Singapore, Hong Kong, Thailand and Malaysia, has been for the last five years working in the ADR space in Bangladesh.

It is the only ADR institution in the country and can play a more effective role if utilised to assist in the process of making enforcement of contract. 

Effective ADR in the commercial legal infrastructure is now not a 'good to have', it is increasingly becoming a 'must have' for Bangladesh. The positive 'spin-off' from this will be a much desired improvement in our 'Doing Business' ranking with consequent impact on foreign direct investment.

There have been reports in newspapers that Bangladesh Investment Development Authority (BIDA) has recently undertaken a project to improve this global ranking of Bangladesh.

It is indeed one of the most important initiatives this institution has taken which the precursor institution, BOI, should have done much earlier.

Muhammad A (Rumee) Ali is the CEO of BIAC and a former deputy governor of Bangladesh Bank.