TCS Daily


Bad for Business

By Hans H.J. Labohm - November 22, 2005 12:00 AM

Adam Smith's "Inquiry into the Nature and Causes of the Wealth of Nations" is still far from finished. Although we have an approximate understanding of the forces which influence the wealth-creating capacity of societies, mysteries remain. Some factors are beyond our control, such as climate, nature and natural resources. Others are persistent and hard to change, such as values and norms, institutions and political systems.

But both theory and practice have proved that the market economy is the best system to create wealth, which in poor countries equals the reduction of poverty. There are still major differences in the performance of market economies, because of natural endowments, but more often than not, because of man-made impediments. Rich countries may assist poor countries to accelerate their economic development by aid, loans and foreign direct investment. More important is increased market access for the exports from those countries. But those who closely follow the vicissitudes of the current WTO Doha Round know that this is a Sisyphean task. There are, however, easier and less costly routes to prosperity, for which poor countries do not depend on the good-will and cooperation of rich countries, because they can pursue them entirely on their own. The promotion of the activities of their own private sector is a case in point. It offers ample opportunities to reap rich benefits with little or no costs.  

"If you were opening a new business in Lao PDR, the start-up procedures would take 198 days. If you were opening one in Syria, you would have to put up $61,000 in minimum capital - 51 times the average annual income. If you were building a warehouse in Bosnia and Herzegovina, the fees for utility hook-up and compliance with building regulations would amount to 87 times average income. And if you ran a business in Guatemala, it would take you 1,459 days to resolve a simple dispute in the courts. If you were paying all business taxes in Sierra Leone, they would take 164 percent of your company's gross profit."  

These are the opening sentences of "Doing Business in 2006 -- Creating Jobs", a report cosponsored by the World Bank and the International Finance Corporation, the private sector arm of the World Bank Group. This is the third in a series of annual reports analyzing regulations that enhance or constrain investment productivity and growth. The latest report comprises many useful indicators on the business environment, pertaining to starting a business, hiring and firing workers, enforcing contracts, registering property, getting credit, protecting investors, closing a business, business licenses, trading across borders, and paying taxes. The report does not track variables such as macroeconomic policy, quality of infrastructure, currency volatility, investor perceptions, or crime rates.  

The data cover 155 countries. The top 30 economies in the world in terms of the report's ease-of-doing-business index, in order, are New Zealand, Singapore, the United States, Canada, Norway, Australia, Hong Kong/China, Denmark, the United Kingdom, Japan, Ireland, Iceland, Finland, Sweden, Lithuania, Estonia, Switzerland, Belgium, Germany, Thailand, Malaysia, Puerto Rico, Mauritius, the Netherlands, Chile, Latvia, Korea, South Africa, Israel, and Spain.  

As the report notes, reforms, while often simple, can create many new jobs. Jobs are a priority for every country, and especially the poorest countries. Doing more to improve regulation and help entrepreneurs is crucial to creating more jobs - and more growth. It is also a key to fighting poverty. Women, who make up three quarters of the work force in some developing economies, will be big beneficiaries. So will young people looking for their first job. The past year's diverse range of successful reformers -- from Serbia to Rwanda -- are showing the way forward. "We can all learn from their experience," said Paul Wolfowitz, president of the World Bank Group.  

Yet, worldwide progress in streamlining business regulation is uneven. Some countries are doing well, others not. In the global ranking, African nations impose the most regulatory obstacles on entrepreneurs and have been the slowest reformers over the past year. Meanwhile, every country in Eastern Europe improved at least one aspect of the business environment, and - surprisingly - countries such as Serbia and Montenegro and Georgia topped the global rankings for most reforms enacted.  

Eastern European nations are courting entrepreneurs with far-reaching reforms that reduce business regulations and taxes, but African and Middle Eastern nations with high youth unemployment rates continue to thwart small and medium businesses with heavy legal burdens and piecemeal reforms. For example, an entrepreneur in Mozambique must undergo 14 separate procedures taking 153 days to register a new business. In Syria, it takes 63 days, 18 documents, and 47 signatures from the moment imported goods arrive in ports until they reach the factory gate.  

However, the authors of the study did note exceptions: Rwanda is among the biggest reformers in the past year; Mauritius also reformed in several areas and is among the countries with the most business-friendly conditions, as is South Africa. Still, for every three African countries that improved business regulations, another one made them more costly.  

The report finds that poor countries levy the highest business taxes in the world. These high taxes create incentives to evade, driving many firms into the underground economy, and do not translate to higher revenues. Similarly, the analysis shows that reforming the administrative costs of trading can remove significant obstacles to exporting and importing. Customs paperwork and other red tape (often called "soft infrastructure") cause the most delays for exporting and importing firms. Less than a quarter of the delays are caused by problems with "hard infrastructure", such as poor ports or roads. For manufacturers in developing countries, the administrative burdens of trading can pose larger costs than tariffs and quotas.  

All in all, the basic message of the Doing Business Report echoes the immortal words of Pogo, the beloved cartoon creation of Walt Kelly: "We have met the enemy and he is us."
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