Doing Business Blog - The World Bank Group

Looking for Inspiration

The Doing Business project of the World Bank Group, which measures the ease of administrative procedures that matter to businesses such as starting a business, registering a property, enforcing a contract or carrying international trade can be a strong means of holding governments accountable for their work.

Chambers of Commerce, Architects' associations or Law societies may be interested in what a Doing Business-based methodology has to offer. For example, Doing Business data raise simple questions:

- Why does it take 4 days in Armenia but it takes 40 days in Germany and 334 days in Angola to transfer a land title?

- How come building a warehouse, critical for an efficient distribution system of products, takes 13 procedures in South Korea, France, Vietnam and Sao Tome and Principe, yet the time required to go through the various required procedures ranges from 34 days to 255 days in these countries?

The Doing Business project shines light on these differences and suggests where one can look for solutions.... basically to those economies that tend to score better and those that are reforming. Private sector-led initiatives can apply in diverse economies from Saudi Arabia to Azerbaijan to China.

Trade finance, the crisis is hurting!

Le commerce international n’a pas été épargné pendant cette période de crise financière. D’après les statistiques de l’Organisation Mondiale du Commerce (OMC), entre 2007 et 2008 le commerce international a baissé de 6%. Avec environ 90% du commerce financé par des crédits, des assurances ou des garanties -- en d’autres termes, par les banques -- l’année 2009 s’annonce difficile. Parmi les moyens mis à la disposition des commerçants, il y a la lettre de crédit.

Après 400 années d’existence, la lettre de crédit est considérée comme l’un des moyens les plus stables et fiables pour financer l’échange de biens. L’exportateur et sa banque reçoivent une confirmation irrévocable de la banque de l’importateur expliquant que le paiement sera effectué après la réception des documents confirmant l’envoie des marchandises. Jusqu’à aujourd’hui, ceci était considéré une transaction à risque limité, car au pire des cas, la banque pouvait saisir et revendre le cargo si son client ne remboursait pas. Mais voila, la crise financière est survenu. L’assèchement du système du crédit interbancaire, la chute dramatique des index de commodités (transport de coton, sucre, blé, pétrole) et le manque de confiance entre les banques force importateurs et exportateurs, même les mieux capitalisés, de pratiquer l’attentisme afin d'éviter des problèmes de trésorerie.

Alors qui va « bail out » le système de Trade Finance ? Sans commerce international, les plans de développement industriels et de valorisation des produits locaux, tant rêvé par les commerçants africains, peuvent être remis dans les placards. Le chocolat ivoirien, le bois gabonais ou les tee-shirts swazis auront un peu plus du mal à se retrouver sur les marchés occidentaux. Trade finance est l’une des voies express de la contagion de l’économie réelle par la présente crise financière. C’est pour cela que la Société financière internationale (SFI) a décidé de doubler son programme de garantie de Trade Finance à 3 milliard de dollars. Ce projet facilitera l’accès des commerçants à cet outil de crédit, bien plus sécurisant, surtout dans les pays ou le système financier est en développement.

Le rapport Doing Business de la Banque mondiale, analyse le coût, la durée et la complexité des procédures d’importation et d’exportation par voie maritime. En 2009 le rapport a analysé de plus prêt la part du coût d’obtention de la lettre de crédit dans le coût global d’import et d’export. En comparant les régions, il apparaît que, bien que la part de la documentation par rapport au coût global d’importation soit à peut prêt similaire partout dans le monde, la part du coût d’obtention de la lettre de crédit est significativement plus élevée en Afrique Sub-Sahararienne (68% contre une moyenne entre 46% et 57% dans les autres régions du monde).

Région                               Coût de la documentation               Coût de la lettre de crédit

                                       (% du coût total des docs d’import)                (% du coût total d’import)

Asie de l’Est et Pacific                    13%                                                         52%

Asie du Sud                                    14%                                                         54%

Amérique latine & Caraïbe              14%                                                         57%

Moyen Orient                                  17%                                                         52%

Europe de l’Est                                  9%                                                         47%

OCDE                                              11%                                                         46%

Afrique Sub-Sahararienne                   14%                                                         68%

Source : Doing Business 2009

Alors que la plus part des pays africains dépendent de l’industrie du commerce, la réduction des coûts liés à cette activité est une priorité.

Doing Business Contributor “Going Green”

Simutaneously, and perhaps jointly, the financial crisis and global warming tend to be on everyone’s mind. As the financial crisis wears on, it is becoming even more important to find innovative ways for cutting costs and reducing CO2 emissions. Architecture et Construction (A.C.), a Doing Business local partner in Burundi is doing just that.

Prosper Ringuyeneza, a civil engineer working for A.C., invited me to visit a construction site on the outskirts of Bujumbura, where a secondary technical institution financed by an entity in Belgium (Direction Générale de la Coopération au Développement). The project is called Appui à l’Enseignement Technique et Professionnel.

The construction project is of special interest because it is the first time earth compressed bricks instead of the traditional baked red bricks will be used in Burundi. And when asked why the use of earth compressed cricks, Prosper answers “my country has been at war for so long, the forests are depleted. It is now time to save the remaining forests for future generations, cut down the CO2 emission and reduce construction costs.”

This is especially important in an economy where, according to Doing Business data dealing with construction permits and other construction related activities costs 85 times the average income. A.C. has taken example from several countries already using the earth compressed bricks and decided that it was about time to do the same in Burundi. Soil is available everywhere and is cheap, so why not use it.

Traditional baked bricks are made from red clay and are energy intensive. The burning of wood used to make the bricks results in high CO2 emissions and depletes the natural forest. In addition, since the bricks are made in far away villages, the cost of transportation has to be considered as well. This not only increases CO2 emission, but the cost of transportation increases the cost of bricks, rendering constructions very expensive. But there were no other alternatives.

The use of compressed bricks in construction is not new. It has been in use in Europe since 1800. In Sudan, for example, earth compressed bricks are heavily used in construction. One of the leading schools for earth compressed bricks is CRATerre-EAG in Grenoble, France. The first brick-press called “CINVA RAM” was developed in 1956 by Colombian engineer Raül Ramirez.

Now, thanks to this project, Burundi is joining the group of countries using compressed bricks for construction. Earth compressed bricks, as the name implies, are made from a mixture of different soils. The soil at the construction site is first analyzed to determine its quality. Once the brick is done, it will also be tested for its solidity and resistance. The bricks will be made on the construction site, eliminating the transportation cost.

Trade finance

IFC will double its guarantee program for global trade finance to $3 billion. Find out more about the program and see if banks in your country are part of it. http://www.ifc.org/GTFP

 

Democracy and Reforms

There has been a sneaking suspicion that regulatory reforms (a la Doing Business) are easier in less democratic countries as the rulers can decide what to reform without the pain of a lengthy parliamentary or civil society debate. As it turns out, this is incorrect. Democracies are bigger reformers.

This is the main finding in a recent paper by Simeon Djankov and Mohammad Amin, Democracy and Reforms.

The abstract: "We use a sample of 147 countries to investigate the link between democracy and reforms. Democracy may be conducive to reform, because politicians have the incentive to embrace growth-enhancing reforms to win elections. On the other hand, authoritarian regimes do not have to worry as much about public opinion and may undertake reforms that are painful in the short run but bring future prosperity. We test these hypotheses, using data on microeconomic reforms from the World Bank's Doing Business database. These data do not suffer the endogeneity issues associated with other datasets on changes in economic institutions. The results provide a robust support for the claim that democracy is good for growth-enhancing reforms."

This is surprising at first, but on second thought it becomes obvious: democracies bring political competition, and political competition brings the desire to do better economically....hence reforms.

The next question is what other important variables correlate with reforms. Mohammad and I are now working on a paper linking natural resources and the propensity to reform. This is particularly relevant in the past few years, with commodity prices shooting up. Perhaps their recent collapse (not cocoa though) will bring about more reforms. A case of positive externality.

Closing a Business

For years, this topic has been the least active in Doing Business. No more. The recent crisis has brought many businesses to bankruptcy, with countless more to come. It is a good time to be a bankruptcy lawyer.

How timely then that the background paper to Closing a Business has just been published in the Journal of Political Economy. The paper, Debt Enforcement Around the World, is written by Simeon Djankov, Oliver Hart, Caralee McLiesh, andAndrei Shleifer.

The main point of the paper? That rich and common law countries have more efficient bankruptcy procedures; and that the availability of floating charge finance and the absence of appeals during the procedure (as opposed to before the procedure has started) make for more expedient bankruptcy. That rich countries have better bankruptcy is especially heart-warming: they will need it badly in the coming year or two. According to the latest forecast, OECD economies are going to shrink by 1 to 2 percentage points in 2009 alone. This means lots of exit.

The analysis in the paper is already used by other researchers. For example, in a recent paper, Levon Barseghyan (Cornell) shows that inefficient bankruptcy regimes cause more macro volatility as factors of production do not move freely across firms and sectors. Debt Enforcement Around the World is the sixth background paper to Doing Business published in a top economics journal. Another one - Trading on Time  - is forthcoming in the Review of Economics and Statistics. The tax paper is hopefully soon to appear in the American Economic Journal: Macro. That leaves two to go.

A Barro Classic

Robert Barro's 1997 classic Determinants of Economic Growth has a number of interesting analyses on what drives prosperity. Most pertinent for my current research (see an earlier blog) are his findings on growth and democracy. These are mixed.

On the one hand, democracies may retard growth as they institute rich-to-poor redistributions of income (think Ecuador under Correa and Venezuela under Chavez). A number of authoritarian regimes have expanded economic freedoms: Chile under Pinochet, Peru under Fujimori, the Shah's regime in Iran, China under Mao. On the other hand, dictators can use their power to steal the nation's wealth. Think Marcos in the Philippines, and Mobutu Sese Seko in Zaire (now the Democratic Republic of Congo). Democracies can provide a check on such powers. Also, some growth-enhancing policies - for example making it easier for new businesses to start operations - are also politically popular and embraced by the electorate.

Democracy, Growth and Doing Business

My previous blog talked about some research I am doing with Mohammad Amin on the link between democracy and Doing Business reforms. One reason to be excited about the project is that it may settle a big debate in the previous literature: does growth cause democracy or does democracy cause growth?

Various economists have weighed in on this. The discussion goes back to Montesquieu and Aristotle. The former thought that constraining the government through some sort of a democratic process is essential for prosperity (very un-French of him). Aristotle, in contrast, argued that growth in income and education will lead to better political institutions. These views are supported by voluminous work: the new institutional economists spurred by Douglas North have shown various evidence in favor of Montesquieu; Lipset and Barro have shown support for the Aristotle theory.

Bankruptcy in Japan

I just came across a paper describing the various bankruptcy procedures in Japan (circa 2004), and their duration in practice. Japanese bankruptcy law is similar to US laws, but it has a "fast-track" procedure called civil rehabilitation. Introduced in April 2000, it has become the most used procedure. Why? According to a study by Professor Peng Xu at Hosei University, it takes 0.6 years on average from entry into the procedure to resolution. I checked the Doing Business number for Japan in closing a business: remarkably, it is exactly 0.6 years. This is another indication of the accuracy of this indicator in Doing Business.

Democracies Pay Higher Wages

Mohammad Amin and I are soon finishing a new research project, linking democracy to Doing Business reforms. Or, stated more pompously, investigating the link between political and economic governance. Results will be featured here in a week. A preview: democracies reform more.

The result may be counter-intuitive at first. A casual look at the top-10 reformers in Doing Business 2009 lists Belarus, Azerbaijan and Egypt. (However, it also features Botswana - the highest rated democracy in Africa.) There is a good rationale why less democratic countries may reform more: it is easier. The top decision-maker says reforms will happen, and they happen. And there is certainly evidence of this in Doing Business. But it is not the rule. On average, democracies yield more reforms.

Where Companies Start Up

Two weeks ago, the OECD and the EU's statistics agency, Eurostat, published the first set of comparable data on measures of entrepreneurial activity, such as entry and exit rates, and the rate of formation of high-growth companies. So far the data -- which the OECD and Eurostat collected this year from the business registers maintained by national statistics offices, using harmonized definitions of the variables -- cover 15 European countries, the U.S., Canada and New Zealand. It is the beginning of a data collection project funded by the Kauffman Foundation.

Taxes and the Crisis

No one likes paying taxes, and yet the government needs tax revenues to finance itself, and the various infrastructure and social projects it develops. Businesses benefit from these projects (unless the money is wasted in corruption). The real question is how much tax to pay to make both the government and businesses happy.

The Doing Business background study of the effect of taxes on investment, growth and entrepreneurship deals with exactly this question. It investigates all taxes that businesses need to pay in 85 countries.

Take Bulgaria as an example. The average Bulgarian business pays the following taxes: corporate income tax (10% of profit), social security contributions (24% of gross salaries), municipal fee (1% of the value of land and buildings), vehicle tax (950 leva per vehicle), property tax (0.15% of the value of land and buildings), and value added tax (20% on the value the business created using the various inputs and labor). If the average business paid all its taxes, about 35% of its profits will go to the tax collector.

Is 35% the right level of business taxes for Bulgaria? Let's compare to some other countries. Austrian businesses pay 55% of profits in taxes. German businesses pay 48%. Latvian businesses pay 33%. Irish businesses – 29%. Former Yugoslav Republic of Macedonian businesses pay 18%.

There is a good rule in setting taxes: the poorer the country, the lower the tax burden. This is for two reasons. First, poorer countries waste more tax money through corruption. Second, lower tax burdens for businesses lead to more economic activity.

Better Courts, More High-Tech Exports

Respect for the rule of law and efficient courts are good for any economy: how true, yet trite. But what would really help a minister of justice in his budget talks with the treasury?

How about: “A country that assures the enforcement of written contracts enjoys a comparative advantage in relationship-specific industries.” Nathan Nunn, an economist at Harvard, found that the quality of a country’s contract enforcement explains more of its export pattern than its physical capital and skilled labor combined. Put simply, if you want to grow your high-tech exports, fix your courts.

His argument: The number of intermediate inputs required determines the relationship-specificity of an industry. While corn milling or petrol refinery are less, automobile or computer equipment manufacturing are more relationship-specific. The more hands you shake with business partners, the more sweat can run.

Power to Rent in Sub-Saharan Africa

Last week, Botswana’s energy utility, Botswana Power Corporation, signed a contract with Chinese firms for the development of a 600 megawatts (MW) power station. The contract was concluded with China's construction consortium, China National Electric Equipment Corporation and Shenyang Blower Works Electro-Mechanics Import and Export Co. Ltd (the CNEEC-SBW Consortium), to build the Morupule B power station. With this investment, Botswana aims to expand its generating capacity and eventually reduce dependency on energy imports. The country is heavily reliant on foreign energy supply and its major power supplier is Eskom in South Africa.

Not only does Botswana need to improve its existing generating capacity, but so do other African countries as well. Power outages are frequent in the sub-Saharan region, which on average counts 14 power outages in a typical month. The economic loss for companies represents around 6 percent of sales due to power outages. This is much higher than in other regions in the world with 8 power outages and a 3 percent loss of sales for Eastern and Central Europe, and 3 power outages and 4 percent loss of sales in Latin America and the Caribbean. Infrastructure, and in particular a lack of power capacity and reliability remains a major constraint for doing business in most African countries.

Naturally Madagascar

Such is the slogan adopted by the government of Madagascar for its development vision. Conceived in 2002, it's meant to allude to the abundant natural beauty with which the island is endowed. It could also refer to the island's aspiration to become a natural choice for foreign investors. The far-reaching reform program that's supposed to make this a reality places a heavy emphasis on improving the regulatory framework to enable the private sector to act as the main source of growth. On a short visit to the capital this week, I've been impressed by the flurry of reform activity in seemingly every quarter.

Trade facilitation is a case in point. This year, Madagascar was one of the top reformers on the Trading Across Borders indicator, introducing an electronic data interchange that links all the main entities involved in the import and export process from customs and the ports to the commercial banks, the Central Bank and the Treasury. Based on the Singaporean model and inspired by Ghana's experience, the system is run by Gasynet, a public-private partnership between the government and SGS, a private company. In conjunction with improvements at the island's main port at Toamasina, the reforms introduced by Gasynet have so far led to an impressive three-week drop in the time required to clear import goods.

Becoming a Super-Reformer

If you want to know how you start from nothing and build up an economy - with the various reforms needed - here is an excellent prop. Kakha Bendukidze, the engineer of Georgia's reforms since 2004, talks about how these came about and what they have achieved so far in a Cato Institute forum. The video is about 45 minutes, worth the time.

Under Bendukidze's leadership, Georgia has moved from 137th on the Ease of Doing Business in 2003 to 15th in 2008. Many other problems remain, political as well as economic. But there is no question that the economic reforms have spurred a previous moribund economy. They have also had a regional effect: Azerbaijan has studied Georgia's reforms and has itself become a top reformer.

Entrepreneurship - the key to prosperity?

Following the G20 summit this weekend, the leaders of the world's largest economies issued a statement explaining how they intend to remake the world's economic architecture. On the very first page of the statement you'll run across the following:

Our work will be guided by a shared belief that market principles, open trade and investment regimes, and effectively regulated financial markets foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment, and poverty reduction.

It might be tempting to treat this merely as empty rhetoric, but I think it's worthwhile to look at what the data actually shows about these relationships. The most recent data from the World Bank Group Entrepreneurship Survey - which covers 100 countries - indicates a very strong (and statistically significant) relationship between entrepreneurship and economic well-being. (Entrepreneurship is measured by the entry density rate of limited liability companies and economic well-being is measured by GDP per capita.)

 

The Birth of a Doing Business Report

November 14 was my due date: I'm supposed to deliver my first baby. It is a girl. Nothing has happened so far. Looking back over the past 9 months, I'm wondering about other events in life that take about the same time and go by (too) fast. A graduate program for example. Or the Doing Business report cycle.

Early January of each year, Doing Business sends out surveys, one for each of the 10 topics, to our 6,700 local experts in 181 economies around the world.

Local experts or 'respondents' as we call them, are asked to return the completed questionnaire 3 weeks later, towards early February. Some do it immediately, others need more encouragement. All 6,700 experts share their expertise for free, "pro bono", knowing their work- through the publication of the Doing Business reports, helps to inspire governments to reform business regulations and cut red-tape.

Keeping SMEs in Kyrgyzstan Powered

On the 1st of November the heating season officially started in the Kyrgyz Republic, a top global reformer in Doing Business 2009. The question of whether the country will be able to avoid major heat and electricity outages has become more pressing than ever.  Due to the especially dry weather since the summer of 2007 the level of water in Toktogul reservoir, which supports the country’s hydro power plant, has been especially low. 

To maintain water reserves for the heating and electricity needs of the cold winter season, the Kyrgyz government imposed electricity rationing in late August.  Every day power was cut for up to eight hours a day in different regions of the country  Naturally electricity cuts were not welcomed by the population as they damaged the economy, especially hurting small and medium enterprises which do not have access to back-up generators

Whether the planned electricity cuts had the desired effects remains unclear.  Saparbek Balkibekov, the Minister of Industry, Energy and Fuel Resources, reported that during October Kyrgyzstan saved over 30 percent of its power energy, and said there should be no electricity blackouts after the 1st of November. However, contradictory to earlier promises, he also reported that both industrial and residential buildings will experience power cuts if consumption limits are exceeded.

The Mighty Potato

A new paper by Nathan Nunn (Harvard University) and Nancy Qian (Brown University) comes up with a startling conclusion: the adoption of potatoes in the Old World (meaning Europe) explains 17% of the post-1700 increase in population growth and 37% of the increase in urbanization growth.

The basic story is that potatoes require less space than grains to produce the same calorie intake (about two-thirds less, to be exact); they store well; can be planted in fallow lands; do not require much cultivation; and can be eaten by cows and pigs, who in turn provide meat and milk. So much for laughing at the Germans' steady diet of meat-and-potatoes. Turns out it is based on potatoes-and-potatoes.

The introduction of potatoes to Europe can be thought of as an agricultural innovation, akin to cell phones (in communication) or the Doing Business project (in regulatory reform).