Entrepreneurship is often thought to be important for economic growth. But what makes people become entrepreneurs? This paper, published in the Journal of Public Economics, focuses on an institution frequently cited by entrepreneurs as a major obstacle to the creation of a business: the judicial system. It uses a reform as a source of variation in judicial speed in order to evaluate judiciaries’ impact on entrepreneurship. The study focuses on judicial reform introduced in Pakistan in 2002. It concludes that it had dramatic effects on judicial efficiency and consequently on entrepreneurship.
Judicial slowness may reduce incentives to start businesses by deteriorating the security of property rights. It may also limit possibilities of obtaining loans. Finding ways to speed up judiciaries is thus fundamental to economic growth.
In 2002 Pakistan implemented a programme of delay reduction called the Access to Justice Reform. Case-?ow management techniques were taught to judges in 6 out of 117 pilot districts with the explicit objective of facilitating rapid case disposal. By using a panel dataset of the performance of Pakistan’s 875 judges between 2001 and 2003 within a difference-in-differences analysis, this paper has shown that judges disposed of 25 per cent more cases after the reform in affected districts. This spatial and temporal variation in the judiciary’s speed was then used to evaluate its impact on entrepreneurship in a difference-in-differences analysis.
The three rounds of the Pakistan Labour Force Surveys, collected in 2000, 2002 and 2004 and containing extremely detailed data on entrepreneurship, were used to look at two mechanisms through which judiciaries affect entrepreneurship.
- The judicial reform eliminated law and order situations preventing people from working, a reason cited by 10 per cent of the population when prevented from working. This may spur entrepreneurship by creating conditions favorable to business and by improving entrepreneurs’ con?dence that their workforce will not be prevented from working due to law and order situations.
- The willingness of the job-seeking unemployed to arrange for ?nancial resources or to apply for loans almost doubled in affected as opposed to non-affected districts, before and after the reform. Individuals were more con?dent in their ability to obtain credit when unemployed.
These two mechanisms spurred entrepreneurship. The proportion of previously unemployed people applying for permits or looking for the land, building, machinery or equipment necessary to start their own businesses tripled due to the reform. This translated into a one third increase in transitions from unemployment to being one’s own employer or account worker. There was a similar increase in the number of transitions from employee to employer or independent account worker.
If the reform was scaled up to Pakistan as planned under a US$350 million budget, it would increase the entry rate in Pakistan by half, from 2.3 per cent to 3.6 per cent.
- To exemplify the importance of this effect, data from the World Bank Group Entrepreneurship Database indicate that this translates into an increase of Pakistan’s GDP by 0.5 per cent.
- This suggests an important role for the judiciary in shaping economic activity and, considering the cost–bene?t of this reform, for judicial reforms in fostering entrepreneurship.
