Some years ago I was thinking of setting up a conventional
music publishing business in Ukraine and I had a couple of colleagues
over there who could help me. However, when I learned just how many
departments I would have to register with (19) and how long it would
probably take (9-18 months) and the backhanders I would probably have to
pay -- never mind what banks to avoid because of mafia informers always
on the lookout for 'commissions' -- it didn't take me long to withdraw
completely.
Here's why -- and here's why it takes a great deal more energy than any
normal entrepreneur possesses in order to start even a modest business in
many countries. Martin Wolf's excellent article is one reason why some
countries are never going to develop anytime soon.
Keith Hudson
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A SCANDALOUS BURDEN FOR THE WORLD'S POOREST NATIONS
Martin Wolf
Under the pressure of neo-liberal ideologists, governments of developing
countries have chosen market-friendly regulatory regimes. That is the
conventional wisdom. But it is nonsense. Inapposite regulation of
business remains far more onerous in poor countries than in rich
ones.
If you start a business in Australia, Denmark, Canada, New Zealand,
Singapore, Sweden, the UK or the US, it will cost you 1 per cent of the
country's average annual income, or less. In Australia, your business can
be up and running in just two days. In Brazil it will take you 152 days,
in Indonesia 168 and in poverty-stricken Haiti, 203. In Ethiopia and
Niger, starting a business will cost you more than four times average
annual income per head. This cost is quite apart from the investment you
must make in the business itself.
Do you want to manage your workforce? Do not go to impoverished Sierra
Leone, with the most generous annual leave requirement, at 39 days. The
Republic of Congo (Brazzaville) requires 35 days, Ethiopia 33 and Chad,
Ivory Coast and Niger 32. Regulation of employment -- flexibility of
hiring and firing and freedom to negotiate conditions of employment -- is
least severe in Austria, Denmark, Hong Kong, Malaysia, New Zealand,
Singapore, the UK and the US. It is most severe in Brazil, Mexico,
Panama, Paraguay, Peru, Venezuela, Angola, Belarus, Mozambique and
Portugal.
Do you wish to secure payment from a recalcitrant customer? In Guatemala,
you will need to go through 19 procedures, which will take 1,460 days.
Enforcing the same contract will take just seven days in Tunisia, 39 days
in the Netherlands and 50 days in New Zealand and Singapore. In Austria,
the Netherlands, the UK, the US Taiwan, Brazil and Jordan, the costs you
incur will be negligible. In the Democratic Republic of the Congo, the
Ivory Coast, India and the Philippines, the costs of enforcement will be
close to the country's average income per head. In Indonesia, they will
be more than twice average income per head.
Do you need credit? In most developing countries, you will experience
frustration and probable rejection, unless you are well connected. Why is
it so difficult to obtain credit? One explanation is the absence of
shared credit information. A more important obstacle is the lack of legal
protection for creditors. Suppose, for example, you want to collect a bad
loan secured on business equipment. In Germany, Ireland, Tunisia and the
US, it will take a week. In Brazil and Chile it could take five
years.
Alas, you go bankrupt. In Canada, Ireland, Japan, Norway and Singapore,
it should not take more than a year to complete the process. In Brazil,
Chad and India, it will take over a decade.
All these fascinating examples come from the first of a planned series of
studies from the World Bank group.* Instead of the usual polls of experts
or enterprise surveys, the study rests on detailed assessment of the
regulations and laws of 133 countries, against hypothetical examples. To
take just one, researchers asked local experts what would be involved in
recovering an overdue payment worth half their country's average income
per head. They also specified the location and characteristics of the
litigants, the remedy sought and the merit of the claim. In this way, the
study generates an internationally comparable evaluation of regulatory
regimes.
Overall, the analysis comes to three conclusions. First, regulation of
business varies hugely around the world. Second, rich countries regulate
more consistently and appropriately than poor ones. Third, poor
regulation brings dismal outcomes.
The variation in the intrusiveness and cost of regulatory regimes is not
determined only by a country's wealth, important though that is. The
origin of the legal system also matters. Nordic and English systems
impose the least regulatory burden and socialist and French the most,
with the German in the middle. One can expect the worst regulation in the
world in a poor Francophone country.
The costs imposed by inapposite regulation are many: a higher proportion
of businesses operates outside the law; the tax base is smaller;
corruption is greater; unemployment is higher; and productivity is lower.
In Bolivia, for example, one of the most heavily regulated economies, an
estimated 82 per cent of business activity takes place in the informal
sector. In many developing countries, it is close to impossible for a
business to operate successfully inside the law.
Some economists have argued that developing countries should regulate
more, because their markets are more imperfect than those of rich
countries. This is nonsense. First, much of this regulation is
misdirected: making it prohibitively costly to start a business, adjust
the size of the workforce, obtain judgment against debtors and go through
bankruptcy does not make markets work better. Second, the institutions of
governance are normally still more imperfect than the markets they are
supposed to oversee.
Developing countries need to focus their limited resources on the tasks
that matter. The most important are to define and protect property rights
and safeguard citizens against injury from other citizens and the state
itself. There is strong evidence, moreover, that the more intense are the
regulatory interventions, the weaker are these essential protections. As
the Bank study remarks: "Rather than spend resources on costly (and
often ineffective) regulation, good governments channel their energies
into enhancing prosperity."
In general, regulation should be reduced to what is essential,
efficacious and readily enforceable. Markets themselves will do much of
the regulation, provided they are competitive. Governments also need to
use modern technology to improve the efficiency of what they
do.
Policymakers and analysts have been paying too little attention to the
core of what makes businesses work: the ability to start up, close down,
secure credit, demand payment and manage the workforce. In all these
respects, the environment in many developing countries is calamitous. The
countries that can least bear the burden of cumbersome and misdirected
regulation suffer from it most. This is a scandal and a
tragedy.
*Doing Business in 2004: Understanding Regulation (World Bank and Oxford
University Press, 2004)
Financial Times 29 October 2003
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