According to a new report from the World Bank Group, Slovakia and Colombia were the world’s most successful investment climate reformers over the past year, creating electronic one-stop shops for new businesses, shrinking regulatory delays by weeks, improving credit registries, and increasing the flexibility of labor laws.
The Doing Business in 2005: Removing Obstacles to Growth report, co-sponsored by the World Bank and International Finance Corporation, the private sector lending arm of the World Bank Group, finds that such reforms, while often simple, can help create job opportunities for women and young people, encourage businesses to move into the formal economy, and promote economic growth.
The report, however, which benchmarks regulatory performance and reforms in 145 nations, finds that poor nations, through administrative procedures, still make it two times harder than rich nations for entrepreneurs to start, operate, or close a business, and businesses in poor nations have less than half the property rights protections available to businesses in rich countries.
Overall, rich countries undertook three times as many investment climate reforms as poor countries last year. European nations were especially active in enacting reforms. The top 10 reformers for the most recent survey year were Slovakia, Colombia, Belgium, Finland, India, Lithuania, Norway, Poland, Portugal, and Spain. Of the 58 countries that reformed business regulation or strengthened the protection of property rights in the last year, fewer than a third were poor or lower-middle-income economies.
"Poor countries that desperately need new enterprises and jobs risk falling even further behind rich ones who are simplifying regulation and making their investment climates more business friendly," said Michael Klein, World Bank/IFC vice president for private sector development and IFC chief economist.
On average, it takes a business in a rich nation six procedures, 8 percent of income per capita, and 27 days to get started; in a poor or lower-middle-income economy, the same process takes 11 procedures, 122 percent of income per capita, and 59 days. In more than a dozen poor countries, registering a new business takes more than 100 days.
Potential investors in many rich nations enjoy full access to the ownership and financial information of publicly listed companies while investors in most developing countries have hardly any access.
The Doing Business in 2005 report updates the work of last year's report in five sets of business environment indicators: starting a business, hiring and firing workers, enforcing contracts, getting credit, and closing a business; it expands the research to 145 countries and adds two new indicators, registering property and protecting investors. Since last year, 13 governments have asked for their countries to be included in the Doing Business analysis.
"This year, the Doing Business report gives policymakers an even more powerful tool for measuring regulatory performance in comparison to other countries, learning from best practices globally, and prioritizing reforms," said Simeon Djankov, an author of the report.
For example, this year's report catalogs wide variances in hiring and severance costs across countries and shows that high severance costs can discourage job creation. The report also shows that poor regulation of bankruptcy can cause business loans to dry up: in 50 countries, creditors can expect to recover less than 20 cents on the dollar when a business goes bankrupt.
Main research findings of the Doing Business in 2005 report:
· Businesses in poor countries face larger regulatory burdens than those in rich countries. Poor countries impose higher costs on businesses to fire a worker, enforce contracts, or file for registration; they impose more delays in going through insolvency procedures, registering property, and starting a business; and they afford fewer protections in terms of legal rights for borrowers and lenders, contract enforcement, and disclosure requirements. In administrative costs alone, there is a threefold difference between poor and rich nations. The number of administrative procedures and the delays associated with them are twice as high in poor countries.
· The payoffs from reform appear to be large. The report estimates that an improvement from the bottom to the top quartile of countries in the ease of doing business is associated with an additional 2.2 percentage points in annual economic growth. An indication of the payoff comes from Turkey and France, each of which saw new business registration increase by 18 percent after the governments reduced the time and cost of starting a business last year. Slovakia’s reform of collateral regulation helped increase the flow of bank loans to the private sector by 10 percent. The payoff comes because businesses waste less time and money on unnecessary regulation and devote more resources to producing and marketing their goods and because governments spend less on ineffective regulation and more on social services.
· Heavy regulation and weak property rights exclude the poor -- especially women and younger people -- from doing business. The report finds that weak property rights and heavy business regulation conspire to exclude the poor from joining the formal economy. "Heavy regulation not only fails to protect women, young people, and the poor -- those it was intended to serve -- but often harms them," said Caralee McLiesh, an author of the report. The Doing Business report shows that countries with simpler regulations can provide better social protections and a better economic climate for business people, investors, and the general public. The report builds on noted economist Hernando de Soto's work, showing that while it is critical to encourage registration of assets, it is as important -- and harder -- to stop them from slipping back into the informal sector.
The Doing Business in 2005 report finds that reform took place last year mainly in countries that faced competition and had incentives to measure regulatory burdens. In the enlarged European Union, accession countries reformed in anticipation of the new competitive pressures on their businesses; existing members reformed to maintain their advantage against the lower-wage producers from accession countries.
In developing countries, performance targets set by the International Development Association and donor country aid programs spurred poor countries to examine regulatory obstacles and propose reforms. Most reforms focused on simplifying business entry and improving credit information systems. African countries reformed the least of all regions and had the most regulatory obstacles to doing business, followed by Latin American countries.
The top 20 economies in terms of ease of doing business are New Zealand, United States, Singapore, Hong Kong/China, Australia, Norway, United Kingdom, Canada, Sweden, Japan, Switzerland, Denmark, Netherlands, Finland, Ireland, Belgium, Lithuania, Slovakia, Botswana, and Thailand.
The Doing Business project is the product of more than 3,000 local experts -- business consultants, lawyers, accountants, and government officials -- and leading academics, who provided methodological support and review. The data, methodology, and the names of contributors are publicly available online.
(China.org.cn September 9, 2004)