Economic Consequences of Judicial Actions

Keynote address at the Judiciary Conference in Islamabad, 18-19 April, 2014

Economic development literature and empirical evidence over last five decades have clearly established the link between growth and poverty alleviation with good governance. Good governance has now been very much become synonymous with Rule of Law, Property rights and enforcement of Contracts, Accountability, and Transparency. It has also become evident that there are some key institutions which are critical for ensuring good governance. Judiciary and Quasi-Judicial institutions do form part of this core group of key institutions.

Growth rates in Pakistan since 2008 have declined to almost half of the level achieved in the preceding four years. Investment ratio in 2010-11 has been the lowest in the history of Pakistan. Most of the discussion on the stagnation and decline of the economy has rightly focused on fiscal deficits, energy shortages, inflation and high interest rates. But the relationship between the rule of law and investment and business development is not much talked about in popular discourse. In absence of a conducive legal environment uncertainties created by other factors such as political instability, security, law and order, energy, etc., would make matters worse. But a well-functioning judicial system can reassure the investor and act as a countervailing force to these other negative attributes. An investor will part with his financial savings and share his expertise and experience only when he is assured that the firm will make profits. For profitability, the arbitrariness and discretionary behavior of the state actors would have to be kept at bay. To achieve this, non-discriminatory and impartial application of law, enforcement of contracts, protection of property rights and speedy disposal of cases are necessary and perceived to be happening.

The recent judicial activism and suo-motto actions by the Supreme Court and High Courts have done a great deal of good in establishing a new equilibrium between the Executive, Parliament and the Judiciary. This movement while commendable, should not distract the attention from the more mundane tasks of (i) ensuring broad based access to justice; (ii) revision of outdated procedures and laws; (iii) use of modern technology in case management; (iv) encouragement of Alternative Dispute Resolution (ADR) mechanisms, (v) tracking and enforcement of National Judicial Policy 2009; (vi) directing the Special Courts and Tribunals to abide by the deadlines for disposal of cases. These measures will have more lasting and fundamental impact on the economic governance of the country and help remove some of the obstacles in the way of investment and equitable economic growth.

Despite these achievements of the judiciary the economy had to bear certain costs and I will illustrate this with the help of four recent examples.

With all due apologies, the country risk profile of Pakistan that was already quite high has been elevated with the addition of Litigation Risk. Even if the investors and businesses cross all the different hurdles imposed by the Federal, Provincial and Local Governances they are now faced with an additional constraint that adds to uncertainty and unpredictability of investing and doing business in Pakistan. After all the approvals are obtained there is the fear that the Supreme Court or High Courts may take Suo-motto cognizance of the transaction, issue stay order and order lengthy time consuming proceedings to decide the case. Alternatively, some other party not pleased with the outcome of the Executive decision may file a petition that is admitted by the courts. A large number of frivolous petitions are filed every year that have dire economic consequences but the penalty of such filings is insignificant. But the cost to the economy is enormous. There are very few countries which will scare away potential $3 billion investment by World’s leading mining companies for exploring our mining resources in a difficult part of the country. We have not earned a bad name in the international investor community but have to spend millions of dollars in international tribunals to defend our actions. In the meanwhile the mining operations are at a standstill and whatever little foreign exchange we were earning through exports are not accruing at a time when we need it badly. We do not acknowledge that we don’t have the technical knowhow, financial resources, and organizational ability in the public sector to run such a sophisticated operation but we take pride in making false and misplaced assertions. The second blatant example is that of LNG project. Any country facing acute shortage of energy and particularly natural gas would take exceptional measures in order to find sources of supply for overcoming these shortages. But for the last four years we have several tenders biddings and awards but they could not proceed further due to the intervention of the courts. Ladies and gentlemen, we would bow to the courts if they ensure that the process has been transparent and no favors have been done in the award of contracts but what we need is expeditious disposal of these Suo-Motto cases or petitions so that the projects can be implemented and the economics costs in terms of foregone production, missed export orders, laying down of employees can be avoided. The third example is that of privatization of Pakistan Steel Mills. Since that historic decision, we have not carried out a single transaction of privatization. We have incurred losses of Rs. 100 billion or more in Steel Mill but its production is hardly in single digit of its installed capacity. We have to import the products which the Mill used to fabricate and spend valuable foreign exchange. But we are obligated to pay the salaries and wages of the employees who are at present rendering no productive services and also bearing other fixed costs. The more pernicious fall out of this decision has been a sense of fear among the Civil Servants and political leaders for putting out any public assets for sale or transfer to the private sector to avoid the wrath of the judiciary.

The fourth example of judicial activism that is hurting the smooth operations of the Civil Services is the interference in the appointments, promotions, terminations by the Executive branch. While I warmly welcome Anita Turab case judgment whereby the security of tenure of Civil servants has been made a justiciable right I would humbly submit that invoking the fundamental rights ambit to review validity of individual decisions and staying the decisions taken has weakened the powers of the Executive branch and resulted in unnecessary inordinate delays in the process of filling in these key positions. As a result there is a state of paralysis in these bodies at present. Many of the petitions filed by those who are superseded are frivolous but they linger on for long in the courts. The judiciary should certainly ensure that the rules, procedures and processes are in place and have been observed but the application of these rules and processes should be left to the Executive branch.

These are only few examples which in all good intentions and honest motives have together affected the economy and governance structure adversely.

What can be done to improve the effectiveness of the judiciary to have positive impact on the economy?

Let me submit with all the humility at my command and without sounding arrogant or offending the sensibilities of any one that economic decision making is highly complex and its repercussions are interlinked both in time as well as space. For example Prices are determined by interactions among hundreds of thousands of economic agents and no administrator, planer, economist or judge can ever do a better job than the market mechanism. Tampering with this natural way of determining prices seriously distorts the allocation of resources as no individual or group can ever have the enormous information that is needed for deciding what the prices level should be. Administered or prices fixed by any other means result in winners and losers and have distributional consequences.

For example, Producer prices of Wheat form the incomes of the farmers in the rural areas while the consumer prices of Atta form the main expenditures of an urban family. If the Government decides to increase the prices of Wheat much above international levels the farmers would be the beneficiaries along with smugglers who will earn windfall gains by selling it across the border. There will consequently be shortage of Wheat supply in the urban areas leading to hoarding by the middle men and flour mills. The prices of Atta paid by urban consumers will consequently be much higher than the increase in prices received by the farmers. Inflation will then raise its ugly head. The unintended consequences of this decision due to changes in economic incentives are so widespread and severe that their impact on various classes could not be fully anticipated. Central planning in the Soviet Union, India and Africa collapsed precisely because of this reason. We should learn from these lessons and avoid making the same mistakes.

Private sector and Profit making are not dirty words. They forms the backbone of market-based economy, growth and poverty alleviation. What is undesirable and the judiciary has every right to intervene is Rent seeking through collusion among the private players, favors bestowed by the Executive branch, deviations from the laid down rules and processes, tenders and contracts awarded in non-transparent manner. In other words, if there is any attempt made to dilute or weaken the forces of competition the judiciary has every right to take the offenders to task. But simply opposing Privatization on sentimental, ideological or subjective grounds that family silver i.e. public assets will be sold to private profit makers without taking into account the larger economic impact does more than good to the economy.

I would now turn to more specific proposal for your consideration.

First, Access to judiciary is limited to only those who can afford good lawyers and pay their enormous fees and expenses. An ordinary litigant, however genuine his claim may be, therefore bows before the influential or seeks the help of non-conventional methods of dispute resolution. Unequal access to justice is one of the main factors that perpetuates the patronage capacity of politicians and, in turn, leads to poor economic governance. Feudalistic ethos that pervades our governance structure cannot be altered until all citizens are treated equally by law. Today, it is only the rich who can manipulate the system to their advantage.

Second, the laws governing economic transaction such as the Contract Act, the Evidence Act, the Registration Act, the Transfer of Property Act, the Stamp Code, were made in the 19th or 20th century. They are not only deficient, defective, outdated but in some instances their applicability is limited. The most important law that needs updating is the Land Revenue Act to make it more germane to the modern demands of agriculture, agro-business, industry, commerce, infrastructure, etc. Land use for industrial, commercial and agricultural purposes is critical to production of goods and service. Land disputes on title and possession both in the urban and rural areas form the bulk of civil litigation at the local levels with appeals escalating all the way to the Supreme Court. The process of adjudication is not only tedious, cumbersome, expensive but time consuming. Transparency of land sales through clear land titles and market based transactions would reduce the volume of litigation and promote efficient use of land – both urban and rural.

Third, the capacity of Judges in the substance, content of Economic related processes and that of lawyers engaged in this line of specialization should be built and continuously upgraded. A large number of defective decisions are delivered because of the inability to grasp the intricacies of the principles underpinning the transaction. The entry and standards of Legal Education, in general, have to be exalted to the same level as other professions such as Medicine, Engineering and Accountancy. Expert witnesses as Amicus-Curae should be invited more frequently in order to clarify the concepts and aid the courts.

Fourth, Case load management in our courts particularly at the lower level is ridden with discretion, corruption, delays and inefficiencies. For the last decade an attempt is being made to manage the load through a transparent computerized system but the results have been sporadic. Unless the top judicial leadership assigns strict deadline there is little chance that it will be completed. Rigorous supervision of the lower courts and taking penal actions against non-performers and rewarding those who are quick and fair in disposal of cases should be institutionalized.

Fifth, while we all rightly criticize the informal jirgas, sardari practices and Qazi Courts, the fact remains that we have been unable to extract the essential ingredients of these informal systems and enrich the formal legal systems. The uprising in Malakand Division was inspired by the Mullahs who contrasted the speedy and expeditious justice of the Shariah Courts in the days of Wali of Swat with the established judicial system applied in the area since the merger of Malakand in the province of NWFP .Federal Board of Revenue (FBR) had implemented an Alternative Dispute Resolution mechanism until 2008. As soon as the new government took power it abolished the mechanism rather than fixing its defects and weaknesses and making it more effective. Small Causes Courts and properly functioning village level Masalahit Committees and other means of ADR can take a lot of load off the present congestion in our courts and also provide access to justice at very little cost.

Sixth, a ray of hope appeared in 2009 when the National Judicial Policy was announced. The policy made some very radical pronouncements such as cases relating to banking and different taxes and duties such as income tax, property tax, etc., should be decided within six months. All stay matters should be decided within 15 days of grant of interim injunction. Rent cases should be decided within four months in trial courts and appeals within two months. Cases regarding suits upon bill of exchange, hundies or promissory notes, should be decided through summary procedure within 90 days.

Seventh, the Banking system cannot simply work if willful defaulters can obtain stay orders from the courts and hundreds of billions of rupees of Bank loans remains stuck. Even where the courts have decided cases in favor of the lenders the execution of decree takes a long time. The unscrupulous borrowers are happy that they can use the borrowed money for decades or years without servicing the loans. The same is the case with the income tax, sales tax, customs pendency. Special courts are either without judges or some of the judges do not have full competence over the specialized laws and regulations. The cases are adjourned and remain undecided for decades. The NJP should involve a more proactive monitoring mechanism. According to the Annual Report of 2012 the disposal by the Banking Courts was 23694 out of 68973 cases outstanding i.e. 34 percent disposal lower than 42 percent disposal by all Special Courts and Administrative Tribunals. Conviction rates for insider trading, tax evasion, loan default and other economic crimes are quite low. The deterrent effect of the laws on the books is then almost absent and the behavioral change towards better observance and compliance is almost non-existent.

As one of the leading Pakistani lawyers has so aptly commented that the English model on which the Code of Civil Procedures (CPC) 1908 was based was discarded even in England a long time ago. The English model “preferred form over substance on account of this fundamental flaw, litigations continue in Pakistan for decades while lawyers squabble over issues of virtually no consequence. In each litigation there is a lawyer seeking justice for his client and an opposing lawyer who will very successfully prolong and delay the litigation while liberally drawing upon various dilatory provision of CPC. Knock outs on the basis of hyper-technicalities and the causing of abnormal delays are in fact appreciated and considered ‘assets’ and ‘qualities’ of astute lawyers.”

To conclude, the National Judicial Policy has very pertinent elements which if implemented can make judiciary a major contributor towards good governance. The problem as usual in Pakistan is the lack of implementation. The Honorable members of the committee overseeing the Policy will do a great service to this nation if they regularly monitor and ensure that the Policy is being implemented both in letter and spirit. This single outcome will be hundred times more potent than hundred disparate cases of judicial activism.

Table 1: Performance of Special Courts and Administrative Tribunals
S # Title of Tribunals/ Special Courts Number of Courts Pendency on  Total offer Institution and Transfer Disposal during the year Balance on 
1/1/2012 31-12-202
1.         Accountability Courts 22 451 566 180 386
2.         Anti-Dumping Appellate Tribune 1 2 9 7 2
3.         Appellate Tribunal Inland Revenue 4 6755 17307 7860 9447
4.         Custom Appellate Tribunals 8 2700 4265 1553 2712
5.         Drug Courts 9 2333 4983 2510 2473
6.         Environmental Protection Tribunals 4 1131 377 98 279
7.         Foreign Exchange Regulation Appellate Boards 2 52 54 15 39
8.         Special Courts (Central) 8 5877 11693 5647 6046
9.         Special Courts (CNS) 6 1335 2622 1613 1009
10.     Special Courts (Customs, Taxation and Anti-Smuggling) 4 553 827 151 676
11.     Special Courts (Offences in Banks) 3 964 1354 139 1215
12.     Insurance Appellate Tribunal 1 42 57 4 53
13.     Banking Courts 29 45021 68973 23694 45279
14.     Commercial Courts 2 23 25 2 23
15.     Federal Service Tribunals 3 1912 6648 3092 3556
16.     Provincial Services Tribunals 4 6452 14711 6066 8125
17.     Anti-Corruption Courts (Provincial) 17 4883 7771 2374 5408
18.     Anti-Terrorism Courts 49 2238 5048 2743 2237
19.     Consumer Courts 11 2017 6926 4430 2566
20.     Labour Courts 26 14988 29172 17540 11771
21.     Labour Appellate Tribunals 7 5902 10246 2815 7294
Grand Total 220 105631 193634 82533 110596

Source: Law and Justice Commission of Pakistan (2013)


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