Thursday, 31 October 2013

Doing business

The newest Doing Business Report 2014 once again sheds light on where in the world opening and owning a business is a welcomed venture, and where you would be better of not being in the private sector at all. 

The report is an annual World Bank publication comparing countries in 10 different areas of business regulations such as starting a business, resolving insolvency, getting licences and permits, and even credit availability. It ranks countries based on the ease of starting and handling a business, thereby painting a picture to investors as to which country is more open for investments, i.e. more business friendly. For lower-income countries specific policies aimed at lowering the regulatory burden on businesses will ensure they rise high on the rankings, while for high-income countries, the relative strength of their institutional environment will still keep them on top, despite some of their policies being less business friendly than expected. 

For example, in my Adam Smith Institute report published last year, there is a series of policies aimed at releasing some of the burdens that still worry a lot of UK business owners, particularly the small and medium sized ones. They were (and still are) concerned about high National Insurance Contributions (NIC), unfair dismissal laws, an increase of business rates, new regulation coming from the EU, and of course credit availability. However, despite these problems (and some others), the UK still offers a favourable business environment where a lot of entrepreneurs would be happy to start and register a company. And they do. London tends to be a very attractive start-up destination for many European entrepreneurs, particularly those from Eastern Europe. And this is all because of the relative strength of UK's institutions, and the fact that London's financial superpower position makes it attractive to search for funding. So despite many UK SME business-owners worried about the scope and size of many regulatory constraints, the UK still manages to attract many new business ventures who will, despite facing the same problems, still rather chose the stability and strength of the UK economy to fulfill their ideas, than having to deal with the relatively inefficient domestic institutions (wherever they come from).

Top of the pops 

So who's topping this year's list (data collected from June 2012 to May 2013)? Singapore and Hong Kong are still holding firmly to the first two positions. Followed by New Zealand, United States, Denmark, Malaysia, Korea (South obviously), Georgia, Norway, United Kingdom, Australia, and the rest of Scandinavians (Finland, Iceland, Sweden). The two unusual inclusions, Malaysia and Georgia, are recognized for the pace and efficiency of their regulatory reforms. Judging by this alone, in the long run these countries are likely to excel very rapidly and thus quickly bridge the gap with the developed economies. Good luck to them, as I can only say they are on the right track. Some other positive examples loom, such as Mauritius (#20), Macedonia (#25), Rwanda (#32) (recall this positive example from Rwanda), Armenia (#37), Montenegro (#44) etc. None of these countries are "paradises", but they are all making the step in the right direction. For example Rwanda (along with Ukraine) implemented the largest amount of reforms in the observed period that reduced costs and complexity for businesses (a total of 8). Along with Rwanda and Ukraine, the positive movers in terms of implemented reforms were Russia, Philippines, Kosovo, Djibouti, Ivory Cost, Burundi, Macedonia and Guatemala. 

In total, 114 economies implemented 238 regulatory reforms aimed to ease the regulatory burden in their domestic economies. A positive trend indeed. This produced the second highest number of reforms since 2009. I guess for many countries it was now or never, even though the pace of reforms in a lot of these countries is still too slow. However, the good news is that low-income countries are narrowing the gap with the high-income ones. Their logic is rather simple; since their institutional environment is still rather weak, and since their stability is questionable, the only way to attract foreign investments is to deregulate the business environment. As more investment is being brought in, it is likely to pull the country out of its poverty trap and create scope for refining the existing institutional environment and hence achieving higher levels of prosperity. Of course the initial push is necessary, and it consist of an initial set of institutional reforms that all these countries are in fact doing. This is the best way to ignite the positive reinforcement mechanism.

Closing the gap

However, the current comparison between rich and poor countries still infers a wide gap (see graph below). The rich OECD countries perform better at every category tested (on average), with the largest gap being in resolving insolvency and trading across borders. In order for the developing economies to truly catch up they need to at least equate the average OECD business freedom levels.
Source: The Economist. Doing Business Report 2014
This means there is still a lot of work to be done, as reformer countries tend to be more successful in some areas but terrible in others. The Economists cites the example of Azerbaijan which ranks in the top 15 easiest to register property, and simultaneously the worst 15 for getting construction permits. Areas like those are still the source of high corruption and vested interests, and this is actually where the reforms should start. 

In conclusion, the report works wonders in at least partially explaining the institutional difference between countries. I would say it suggest of a negative reinforcement mechanism between poor institutions and poor performance, as the worse off the domestic institutional environment, the harder it is to reform it. On the other hand it suggest of a strong positive reinforcement mechanism where countries which were quicker and more successful to reform, managed to create better growth opportunities for the private sector. Policymakers worldwide should take note of this. 

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