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Are you open for business?
Wednesday, 09 September 2009 00:51

 

Governments can do a lot to help economic development.  At the very least, they should do no harm, they should not make it difficult for people to do business.  According to the World Bank’s publication “Doing Business”, many of the world's governments, especially in poorer countries, do make business difficult, often pushing people into the informal sector.  This is regrettable because research finds that: lower barriers to starting up a business are associated with a smaller informal sector; lower costs of entry can encourage entrepreneurship and reduce corruption; and simpler start-up can translate into greater employment opportunities.

 


“Doing Business” is a very revealing publication which investigates the regulations that enhance business activity and those that constrain it across 181 countries from Afganistan to Zimbabwe.  In particular, it looks at domestic small and medium-size companies and measures the regulations applying to them through their life cycle.  Regulations affecting 10 stages of the life of a business are measured: starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business.

 

 

 

 

The goal is to provide an objective basis for understanding and improving the regulatory environment for business.  A fundamental premise is that economic activity requires good rules.  These include rules that establish and clarify property rights and reduce the cost of resolving disputes, rules that increase the predictability of economic interactions and rules that provide contractual partners with core protections against abuse.  The objective is to have regulations which are designed to be efficient, to be accessible to all who need to use them and to be simple in their implementation.

 

So who tops the charts?  The top 10 economies in terms of the ease of doing business are: Singapore, New Zealand, United States, Hong Kong, Denmark, United Kingdom, Ireland, Canada, Australia and Norway.  Hardly surprising, these are all developed and dynamic economies, although the current global financial crisis might suggest that it is too easy to do business in countries like the US, UK and Ireland (and also Iceland which comes in at number 11).  The dynamic economies of East Asia also rank high – Japan (12th), Thailand (13th), Malaysia (20th) and Korea (23rd).  The BRICs do not do so well – China (83rd), Russia (120th), India (122nd) and Brazil (125th).  The bottom 10, starting from 181st and moving up to the 172nd are Democratic Republic of Congo, Central African Republic, Guinea-Bissau, Republic of Congo, Burundi, Sao Tome and Principe, Chad, Venezuela, Eritrea, Niger.

 

On a regional basis, for the fifth year in a row, Eastern Europe and Central Asia led the world in Doing Business reforms.  Twenty six of the region’s 28 economies implemented a total of 69 reforms.  The region surpassed East Asia and Pacific in the average ease of doing business in 2007, and maintained its place this year.  Four of its economies – Georgia, Estonia, Lithuania and Latvia – are among the top 30 in the overall Doing Business ranking.

 

Overall, reform momentum is up many parts of the world.  In both East Asia and the Middle East and North Africa, two-thirds of the economies undertook reforms.  Sub-Saharan Africa continued its upward trend too, with 28 economies implementing 58 reforms.  OECD higher income economies saw a slowdown in reform, as did South Asia.

 

To see the real interest in this “Doing Business” exercise, you need to dig into some of the numbers.  Let’s compare for example Singapore, the top performer, with the Philippines, Asia’s eternal basket case, which ranked 140th in the world in terms of the ease of doing business:

 

.  how many days does it take to start a business – in Singapore 4 days, in the Philippines 52 days.

.  how many days are necessary to deal with construction permits – in Singapore 38 days, in the Philippines 203 days.

.  what is the cost of firing workers – in Singapore 4 weeks of salary, in the Philippines 91 weeks of salary.

.  how many hours does it take to pay taxes – 84 hours in Singapore, 195 hours in the Philippines.

.  to export, how many documents do you need – 4 in Singapore, 8 in the Philippines.

.  how many days does it take to enforce a contract – 150 days in Singapore, 842 days in the Philippines.

.  how many days does it take to close a business – in Singapore 0.8 years, in the Philippines 5.7 years.

 

These examples show the very important practical value of the Doing Business exercise.  Quite clearly, the development potential of the Philippines is held back because it is very difficult to do business in that country.

 

Quite obviously, “Doing Business” does not measure all aspects of the business environment that matter to firms or investors – or all factors that affect competitiveness.  It does not, for example, measure security, macroeconomic stability, corruption, the labour skills of the population, the underlying strength of institutions or the quality of infrastructure.  Nor does it focus on regulations specific to foreign investment.  It does not cover all regulations, or all regulatory goals, in any economy.  As economies and technology advance, more areas of economic activity are being regulated.  For example, the European Union’s body of laws has now grown to no fewer than 14,500 rule sets.

 

But the exercise is sufficiently powerful that emerging economy government ministers doing investment road-shows often brag about how well they are scoring in Doing Business.  Just goes to prove that as soon as you measure something, you make the phenomenon transparent, and you create an incentive to do better.  Congratulations to the World Bank!

 

 

 

References:

 

Doing Business 2009, A copublication of the World Bank, the International Finance Corporation, and Palgrave Macmillan

www.worldbank.org

 


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