BizCLIR

Along with the specific findings in 13 subject matter areas detailed in Sections III–XV, certain cross-cutting themes emerged with respect to commercial legal and institutional reform (CLIR) and trade in El Salvador. It is important to consider and incorporate these themes but not necessarily through stand-alone initiatives. Rather, it would be prudent to address these themes within the context of any reforms undertaken, as further detailed below.

A. THE URGENCY OF JUDICIAL REFORM

In virtually every section of this report—contracts, collateral, real property, bankruptcy, flow of money, and others—the inability of El Salvador’s court system to facilitate the prompt resolution of commercial disputes and the enforcement of their own judgments is identified as a fundamental problem. The many aspects of this issue include a lack of public confidence in judges (because of their perceived lack of competence and, in many instances, suspect credentials, along with an unduly formalistic approach to the law), the overall inefficiency and sluggishness of court processes, a lack of significant automation in the courts, the virtual impossibility of enforcing court decisions in a timely fashion, and so forth.

This absence of confidence in the courts represents more than a stumbling block on the path of economic development—it is a mile-high wall that will serve as a barrier to growth for years to come. Prompt, nonbureaucratic, and effective court action, based on reliable information garnered from the country’s formal registries, is not yet a reality in El Salvador. As a significant consequence, the use of collateral is so restricted that even the best-laid plans for business development typically are thwarted by a lack of access to capital. Notwithstanding laws that permit pledges on movable property, entrepreneurs who do not own real property have little chance of obtaining a loan at the start-up phase. Loans typically are made on the basis of movable collateral only when the business is well established and immovable property has already been secured. In addition, loan guarantees against movable collateral typically require high overcollateralization; that is, the lender may loan as little as 20 percent or less of the collateral’s value.

Until the commercial community in El Salvador trusts that the courts are capable of affording remedies in the event of defaults on loans and breaches of contracts, there will, quite simply, be fewer loans and fewer contracts than the economy could otherwise support. In short, the great risks involved with extending credit or engaging in an arms-length transaction will result in less economic activity and less growth. Even the development of alternative dispute resolution (ADR) mechanisms will not overcome the restraints El Salvador’s underfunctioning court system places on the economy—that is, there will be no confidence in ADR in the long run if the courts cannot be trusted to enforce ADR agreements and awards.

It is well known that the courts in El Salvador require reforms to meet adequately current demands and internationally accepted norms. In this regard, various projects aimed at strengthening the courts are under way, including an $18.2 million loan/credit from the World Bank, approved in 2002, and, in fiscal year 2005, more than $5 million from the United States Agency for International Development (USAID) dedicated to increasing access to justice and improving court case preparation; improving the transparency, efficiency, and promptness of the court system; promoting ADR; and combating corruption throughout Government.

That said, there does not yet seem to be a comprehensive vision held between the donor community and the Government that focuses on the bright line that crosses from the desire of an individual to launch a business to the ability of that person to access capital and to the ability of a business, once established, to collect on its debts. Until the commercial capabilities of the courts change, little can be done to release constraints on access to capital and economic growth. Thus, all future programs in CLIR should incorporate the judicial component of the issue. This would include leveraging the resources of existing court reform programs to emphasize the relationship between court reform and economic growth and, where gaps remain, formulating technical assistance efforts that do the following:

• Improve the commercial capacity of courts through administrative and automation processes that make the process of dispute resolution faster, more predictable, and more transparent.
• Train judges in areas pertaining to commercial activity, particularly with respect to modern types of commerce and newer laws, such as the new competition law, potential laws pertaining to modern contracts or electronic commerce, and laws concerning money laundering.
• Attempt, through training and statutory reform, to address the overly formalistic, anti-growth aspects of the law and the judiciary.
• Through public outreach, persuade businessmen that the courts in El Salvador are to be trusted to uphold their commercial agreements.

B. PROFESSIONAL COMPETENCIES, WITH AN EMPHASIS ON LEGAL EDUCATION

Throughout this report, weaknesses in legal and trade-related institutions are observed to be significantly grounded in inadequate professional capabilities, not only among judges but also with respect to lawyers, notaries, government officials, private actors, and others. For example—
• There are roughly 3,000 lawyers for whom the validity of legal degrees is dubious. Certain universities, which no longer exist, were known to sell law degrees.
• The lack of an independent bar association or a similar body for notaries means that lawyers (most of whom are notaries as well) are not well-regulated, are not held to particular ethical standards, and are not required to engage in any sort of continuing legal education.
• To various degrees, the police academy, the Consejo Nacional de la Juridicatura (CNJ, or National Judicial Council, which is, among other roles, one of the primary training institutions for judges), and schools responsible for training professionals, such as law and accounting schools, all fail in providing sufficient opportunity for individuals to develop a skill set for combating financial crimes before being assigned the role in a professional setting.
• In the private sector, technical skills are often weak, with inadequate skills in marketing, accounting, operations, and—particularly with respect to SMEs—information technology skills.
• Within the courts of first instance, judges must not only be legal practitioners but also administrators as there are very few court administration or management professionals.
• In the courts, judges tend to overemphasize formal, process-oriented decision making, perhaps to obscure a very weak grasp of the substance of the commercial laws they are asked to interpret. They do not typically search for the reality of corporate matters, it is said, but rather seek to comply with the formalities.
These and other often-cited weaknesses in the performance of professionals who work in the commercial law or trade arena warrant cross-cutting consideration. Even in the context of low salaries, poor physical facilities, and other negative circumstances, the opportunity to learn more and do better will likely find an audience in the various institutions this report surveys. Reform programs can confront and address poor command of subject matter, poor management and problem-solving techniques, and lack of institutional consistency in a number of ways. These include the following:
• Strengthened professional organizations that serve their constituencies through common guidelines, standards, resources, and means of professional oversight.
• Improved access to and quality of continuing education for virtually all commercial and trade-related professions.
• Collective development of codes of conduct and increased public understanding of what they are entitled to expect from public officials engaged in commercial and trade-related work.
• In the private sector, better accounting practices, more efforts at transparency, and stronger adherence to principles of sound management.

As a matter of particular urgency, the system of educating lawyers needs reform. As detailed in the commercial dispute resolution section of this report, approximately 20 universities in El Salvador have a law faculty, but according to interviewees, only 1 or 2 of these schools reportedly produce lawyers who are adequately prepared for the actual practice of law. Law schools face delays and other obstacles in changing their curricula, as any such adjustments must be approved by the Ministry of Education. A handful of educators and practitioners try to keep up with the constantly advancing field of international commercial practice, but they are sometimes stymied by a lack of interest. For example, one knowledgeable practitioner interviewed for the assessment offered to give classes on the use of arbitration at approximately 40 schools and associations; only two expressed interest in taking advantage of this offer.

USAID is positioned to serve as a leader among donors in forging and supporting a coordinated effort to improve commercial legal education. In addition to providing key funding support, USAID could bring together donors and local stakeholders to develop a strategic, coordinated, approach to commercial legal education in El Salvador. USAID could specifically provide leadership with respect to sharing lessons learned and consulting on curriculum development. To establish a baseline for reform, the following questions need clear answers:

• What commercial law courses are currently available in the standard law school curriculum? Who is the faculty assigned to teach these courses, and to what extent are these faculty members familiar with recent evolution in the law?
• What is the universe of local and donor activity specifically targeted at the law schools? Of this activity, which specifically pertains to commercial law? What is the current level of donor coordination with respect to commercial law-related assistance to the law schools?
• What long-term reforms are necessary to allow the law schools to provide a comprehensive and meaningful curriculum in commercial law? How can these reforms be prioritized? What existing structures are in place within the legal education community to oversee and guide a long-term reform process, and what new structures might be necessary?
• What short-term methods could be used to get much-needed information and assistance to students now? How could donor and local resources be leveraged to most effectively implement these methods?
In reality, reforms to the legal education system in El Salvador will likely take a generation. Through a shared vision of long-term reform, combined with thoughtful and well executed short-term initiatives, a shift in the learning dynamic and the quality of commercial legal education may finally take place in a sustained and meaningful fashion.

C. SMALL AND MEDIUM-SIZED ENTERPRISES AND THE GROWING ECONOMY

Small and medium-sized enterprises (SMEs) employ two-thirds of the workforce of the European Union and about 50 percent in the United States. They also play a vital role in El Salvador, where nearly 500,000 micro, small, and medium-sized businesses were said to be in place at the close of the 1990s. The CLIR and trade assessment team found that SMEs are indeed a driving force in the economy but also found that they face various obstacles in their establishment and growth. The team observed the following:

• Many of the SMEs in El Salvador are informal. It is thought that about 40 percent of the Salvadoran economy operates outside the formal commercial sector. Some micro businesses have expressed that they do not formally incorporate because of excessive regulatory steps. When SMEs do not enter the formal sector, they are unable to take advantage of laws and programs that support their continued growth. In turn, the state is deprived of tax revenues that are used to support a legal and physical infrastructure that sustains economic growth.
• Financing for SMEs (especially informal ones) is not easily available. Some programs have been implemented to assist SMEs in the exportation of goods. Those programs often lack funding, however, and are not sufficiently coordinated. Marginal candidates for credit, including virtually all SMEs, cannot gain access to credit from conventional lenders.
• The technical needs of the SME sector are great. Currently, according to interviewees, only 5 to 8 percent of its members have information technology capability.
In general, SMEs are at a disadvantage in El Salvador’s economy, which—notwithstanding significant recent progress—suffers from weaknesses in certain crucial institutions. Costs and risks associated with doing business are all the greater for smaller businesses. Indeed, the costs of start-up and operation can be crushing to a new business that has virtually no access to capital. SMEs must bear significant expenses at every point in their life cycle. Some of the most burdensome costs include taxes; start-up costs, regulatory burdens, and inspections; labor; security; and high collateral requirements for loans.
In addition, there are major risks involved with launching and growing a business in El Salvador. These risks include the difficulty in enforcing contracts because of the problems in the judicial system and lack of meaningful alternatives in dispute resolution (although the latter is changing); a lack of availability of affordable funding to meet the ongoing needs of a business, especially in a crisis or new opportunity; and, although improvements have been made, the security of domestic, regional, and international trade.
Throughout this report, suggestions for legal and institutional reforms aim ultimately to reduce the cost and risk of doing business. Although many of the recommendations apply generally to both large and small businesses, the vital role of SMEs in the Salvadoran economy warrants special consideration of their particular needs on a cross-cutting basis.

D. THE LESSONS OF SUCCESS

The World Bank recently summarized the highly promising—if far from perfect—state of economic development in El Salvador:
El Salvador has made remarkable progress in the economic, social, and political fronts since it emerged from a 12-year civil war in 1991, but the earthquakes of 2001 have brought new challenges. During the 1990s, growth and stable prices replaced economic decline and inflation. Trade liberalization, financial sector and pension reforms, privatization of state-owned enterprises, and the decision to move to a bi-monetarist regime in 2001 have all contributed to a strengthened economy.

Nowadays, El Salvador has a more deregulated and diversified economy than in the past, is less dependent on agriculture and is developing strong service and manufacturing sectors. As a consequence, standards of living improved and poverty declined markedly during the last decade. Net enrollment in primary education increased by close to ten percentage points, infant mortality declined by 40 percent, population without access to safe water was halved and extreme poverty was reduced by half. By 2000, El Salvador was well positioned to meet most of the 2015 Millennium Development Goals ahead of schedule.

Consistent with the World Bank’s overview, the assessment team observed many specific examples of improved laws, institutional capacities, and practices in El Salvador, including the following:
• The Salvadoran Customs Service is a vigorous, effective agency that facilitates the movement of goods in and out of the country. Already very competent, it is striving to become more so.
• Private-sector users of the agencies that administer international trade matters in El Salvador seem quite satisfied with current practices. They indicate that, across the board, procedures are handled quickly, in a transparent manner, and with virtually no corruption. They believe that the Government, from the president down, gives great importance to international trade and generally supports it in every way it can.
• In the past, El Salvador’s commercial registry lacked the capacity to handle the large quantity of requests it received, but over the past year the registry has made important improvements in its capabilities. As was learned during the assessment process, it currently takes a company about 72 hours to receive a certificate of registration. The Salvadoran Commercial Registry is the only registry in Latin America to have received an ISO-9000 quality certificate. The registry is highly automated, has well-trained officers, and provides good accessibility. On a visit to the Commercial Registry, it was noted that personnel are well motivated and have access to modern equipment.
• By enacting a Competition Law in 2004, El Salvador became the second of only two Central American Free Trade Agreement (CAFTA) countries—the other being Costa Rica—to have such a law in place.
• El Salvador is one of only nine countries to fully adopt the U.N. Convention against Corruption.

These are just a few examples of improvements made in El Salvador in recent years through a commitment of political will, hard work, and forward-looking practices. Its own experience with implementing change bodes well for those institutions that need changing. In addition, El Salvador serves as a model for the region. As noted at various points in this report, there is a strong need at this juncture for the emergence of Central America as a united trade base for increased harmonization and regionalization of laws and practices. El Salvador can serve as a leader in this regard, using regional and international models for guidance as it updates its legal framework, as encouraged at several junctures in this report.