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I had the opportunity to gain some understanding of
what the small business sector was up against in Russia when I was there in
1995. Surely things have improved by now, or have they? The
following is from my diary:
Sergei (not his real name) is from St.
Petersburg, and was in Moscow for the day. He was invited to have supper with
us, and a few of us met with him. His business is writing computer software.
He employs six people, including his wife and an accountant, which seems a
little strange for such a small establishment (i.e., the accountant, not the
wife). He is Jewish, and some of the things he said suggested that he had
undergone some discrimination, but that he expected it and had learned to live
with it. He is well into his forties, and regards himself as middle class. He
speaks very good English - much more fluently than the "learned at school"
variety that you encounter here.
Being a small businessman in Russia is difficult
and requires far more skill and moxy than running a business in Canada. You
want to avoid drawing the attention of both the taxman and the Mafia, since
both can crush the life out of a small business. To avoid the Mafia, Sergei
has kept his address secret for the past few years, though now he has moved
his office into what he considers a completely secure facility and feels he
can operate more openly. To avoid the taxman, he has to figure out the income
level to which he wants to work for tax purposes, keep his books accordingly
(hence the accountant?), and then figure out various under the table means of
getting the rest of his income. There is perpetual frustration because petty
rules and regulations are forever being changed (also hence the
accountant?).
Dealing with the bureaucracy is a full time job.
For example, he can deliver his product to a client by email, but this is not
good enough for the Russian tax man, who believes that a contract has not been
fulfilled until there is firm evidence that something tangible has been
delivered. So as well as sending the product by email, Sergei has to send the
client something tangible by mail and get a piece of paper that demonstrates
that he has in fact done so. Usually, he sends an empty diskette, but this
costs him $79, which he is not always sure that he can write off for tax
purposes (what you can write off seems to vary from year to year). As another
example, a client sends Sergei a check for services rendered and Sergei puts
the check in the bank. However, Sergei cannot draw on the check until he is
able to demonstrate to the satisfaction of the banker that he has indeed
rendered the service by presenting a piece of paper from the client stating
that the contract has been fulfilled. Getting this piece of paper has at times
taken weeks. Sergei as much as implied that he is in on a growing underground
business of counterfeiting the various forms needed by the bureaucracy, which
is necessary just to keep things moving.
A basic problem is that the laws and regulations
which small businessmen work under, and the bureaucracy which administers
them, are inherited from the Soviet era when there were very few
entrepreneurs, or at least when there were few out in the open. They are
designed to catch and punish the small businessman, not to help him. This may
be one reason why the attitude of small Russian business people, right down to
the lady who operates the ice cream cart, is basically defensive.
Another problem is property rights. Sergei works
in the field of intellectual property, but has virtually no protection for
what he produces. He claims to have seen more than a few instances of where
something he has produced has been pirated and incorporated into someone
else's software. And there is still a more general problem - getting Russians
to enter the computer age. Many of the officials he deals with really do not
understand what he is doing and that he is producing something - i.e., do not
understand value added except in a very tangible, physical sense, like making
a component for a machine. And of course behind all of this is the corruption
of the entire system, and the readiness to rip-off anyone who might be making
any money.
Ed Weick
----- Original Message -----
Sent: Wednesday, October 29, 2003 12:36
PM
Subject: [Futurework] Bootstrap
development
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
<<<<
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
>>>>
Keith Hudson, Bath, England, <www.evolutionary-economics.org>, <www.handlo.com>, <www.property-portraits.co.uk>
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