B.E. Assessment

The Cost of Resolving Small Business Conflicts, Peru, IADB 2004

    This study, by Alvaro Herrero and Keith Henderson, analyzes the impact of judicial inefficiency on small businesses in Peru. It is based on the hypothesis that chronic problems in the region's judicial systems have negative consequences on the development of micro, small and medium-sized businesses. The analysis focuses, first, on the relationship between small businesses and the legal system. Secondly, it looks at decisions made by small businesses to mitigate the effects of poor performance by the courts. Lastly, it identifies several ways in which judicial inefficiency is transferred to the business sector. The analysis also attempts to quantify the economic impact of judicial inefficiency.

    Methods for info gathering
    opinion survey of MSMEs, workshop with MSMEs, key informant interviews

    Summary of results
    The results of this study show that businesses have a negative image of the judiciary and that they avoid using the courts system. They view the judiciary as a corrupt, slow, complex and expensive system that is somewhat biased against small businesses. This view of the judicial system lead businesses to attempt to solve their conflicts informally, avoiding the courts at all costs. Other legal issues that also affect small businesses are analyzed including the use of written contracts, official and unoffical costs of litigation and the relationship between small businesses and the state. The analysis found that the costs of litigation are proportionally much higher for smaller debts. There are problems regarding SME access to government procurement processes at all levels. Corruption has a negative effect on various aspects of SME development, particularly on their capacity to gain access to impartial judicial services.

    The problems described above influence the behavior of busineses, often forcing them to mitigate the risks and costs arising from judicial inefficiency. For example, many small businesses avoid entering into contracts, searching for credit, subcontracting some stages of their production processes and carrying out joint purchases or sales. Businesses also tend to avoid changing suppliers and transactions with new customers unless they are secured or in cash.