Tag Archives: doing business

The Push for Evidence-Based Policymaking in International Development

doing-business-2014

Some central questions in international development are how to measure progress, make sound cross-country comparisons, and build the case for political and economic reforms. Multilateral institutions such as the World Bank play the role of repositories of credible, accessible, and up-to-date information that serves as an international benchmark for progress. Access to information is the basis for evidence-based policymaking and can serve as a catalyst for necessary reforms.

The World Bank recently convened a conference to present research around its  Doing Business index at my alma mater Georgetown University. The keynote speaker, Tim Besley of the London School of Economics, discussed the importance of World Bank data that is publicly available and internationally recognized as a reliable source of evidence-based policymaking.

The Doing Business Survey focuses on two main sets of indicators: regulations and legal institutions. The regulation indicators are the number of procedures, time, and cost involved in starting a business, to obtain a construction permit, getting access to electricity, registering property, paying taxes, and the ability to trade across international borders.

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Making it Easier to Do Business in Iraq

Iraq 2020 shares their results with a parliamentary drafting committee. (Photo: Staff)

Iraq is a tough place to do business.  And according to the World Bank’s Ease of Doing Business report, it is getting tougher.  Iraq ranks 164 out of 183 countries this year in ease of doing business, down five spots from the previous year.  For a company to register in Iraq, it would, on paper, take on average of 77 days and cost thousands of dollars.

In a country where business owners in a recent CIPE survey listed corruption as their number one concern and the inconsistent application of rules and laws in the top three, this 77days and thousands of dollars would likely be viewed as a “best case scenario.”  The opportunities for bureaucrats to delay paperwork and demand bribes for each of the eleven steps to register are numerous.  The potential for recourse for the business owner is almost nonexistent.

To illustrate this point, let’s take the step where business owners must obtain a tax registration.  Essentially, the business owner applies to the tax agency, and pays the equivalent of about $380 (bear in mind that Iraq’s per capita GDP is around $3,900 per year) in order to certify that he or she is current with their taxes.  In a country that still relies heavily on paper filing, this is an arduous and expensive task and is rife for unscrupulous bureaucrats to claim irregularities that cannot realistically be verified.   To give a relative comparison, scaling the numbers for the US GDP, this is like an American paying the IRS something like $4,687 to audit them, while knowing that whoever processes the application is likely going to ask for a kickback to not claim there are back taxes owed.  This helps explain why in that same survey only 44% of Iraqi business owners reported that their businesses were actually registered.

The regulations for starting a business in Iraq are extremely constrictive, and directly hinder many companies from becoming formal, and thus legally protected.  This locks them out from avenues to growth.  They are not able to get loans, purchase property, or perform other normal functions a business would do.  This means they are not able to invest in future growth, and, along with their employees, remain in the shadow economy with little recourse or protection.

While the problem can seem overwhelming, a solution may shortly be at hand.  CIPE is working with a local Iraqi organization, Iraq 2020 Assembly, and other private sector representatives to articulate the issues with starting a business by analyzing the existing Company Registration Law,  the law that governs the legal requirements to start a business. As is crucial in any democracy, this sort of advocacy can be the key to ensuring that laws protect Iraq’s overall interest while not unnecessarily stifling economic growth.   By updating this law and reducing the burdens to doing business, the Iraqi economy and Iraq’s shadow workers would benefit immensely.

CIPE and Iraq 2020 Assembly have developed recommendations in conjunction with the Iraqi business community, including the Federation of Iraqi Chambers of Commerce, to address issues and put forth a set of concrete solutions for how to improve the process, including such things as streamlining government procedures to reduce the time and number of steps it takes to register and moving many of the procedures online to reduce opportunities for corruption.

This work has garnered significant attention, including invitations from Iraq’s Parliament to present the recommendations as the government works to draft a new law.  While the problems may seem insurmountable, the Iraqi Parliament’s positive efforts to bring the private sector into the conversation represent a step in the right direction, identifying real solutions to stimulate growth and strengthening Iraq’s democracy.

CIPE and Iraq 2020 Assembly presented the final policy paper on the Company Registration Law to both private and public stakeholders in Baghdad on February 19.

Doing more than business

Not every private sector development expert in the world participates in the World Bank Doing Business Indicators Survey, but those that do will be filling out those surveys this month and next. With those indicators heavy on the minds of many who have worked to improve them since a year ago, these two months are a good time to point out the difference between good governance and democratic governance.

The DB indicators’ nine core areas – Starting a Business, Dealing with Construction Permits, Registering Property, Getting Credit, Protecting Investors, Paying Taxes, Trading Across Borders, Enforcing Contracts, Closing a Business – measure institutional performance of key government functions for private sector activity. A growing number of governments care about their performance on these measures and they see it as a competition. Yet the indicators have important limits outlined in each core areas’ methodology that analysts and media often overlook.

For example, under the Closing a Business area, among other specifics the assumed case study company is a hotel with 201 employees and its only asset and source of income is the hotel property. The value of the hotel is 100 times the income per capita of the economy. The hotel is defaulting on a 10-year loan collateralized by the hotel property and/or a universal business charge where applicable. How many businesses in a given country fit that exact mold?

While assumptions are necessary for the purpose of gathering data, they are important caveats that analysts and reformers often overlook when evaluating the future success of DB-type reforms. How do analysts or reformers know which DB core areas are most relevant to a given country context? If a country improves its score on a core area, how meaningful is that improvement to that country’s private sector?

Just because DB indicators don’t answer those questions doesn’t mean the indicators are useless. Rather than being a way of making governments compete to achieve top-down indicator-specific reforms, the DB indicators can be a useful subject for constructive dialogue between government reformers and private sector stakeholders. The quality of that dialogue is what matters for democratic governance.

No matter how divided politically or ethnically, time and time again economic issues have united disparate factions and helped governance improve democratically as well as functionally. Kenya’s 2007-8 post-election violence and resolution is a powerful recent example of such dialogue that has paved the way for many governance and business-environment improvements, including a vastly improved constitution.

When your reform process itself includes tax-paying citizens and businesses as a driving force, then you do more than improve your DB score and ranking. You’ve embedded those reforms in your country’s ongoing historical process of institutional change. You’ve made those reforms meaningful and applicable to your specific country context. Perhaps you’ve even contributed to a healing process for decades’ or centuries’ old conflicts. In short, you’ve improved democratic governance.

Economic reforms and democracy

The Cato Institute held an interesting event today, “How Nations Prosper: Economic Freedom and Doing Business around the World,” featuring James Gwartney and Robert Lawson, co-authors of the Economic Freedom of the World Annual Report (co-published by Fraser Institute and Cato Institute) and Simeon Djankov, creator of the World Bank’s Doing Business report.

The first two speakers focused on analyzing the implications of the 2008 edition of the Economic Freedom report and its historical trends. The findings clearly demonstrate the connection between economic freedom and greater prosperity. Private investment as a share of GDP is higher in countries with more economic freedom. In turn, investment increases long-term economic growth rates, and sustained growth over time leads to higher GDP per capita. Not surprisingly, countries in the most free quartile have GDP per capita 8 times higher than those in the least free quartile. The findings also emphasize the importance of the quality legal structure. Countries that scored above 7 (out of 10) have incomes 12 times higher than those with least effective legal structures.

But probably the most intriguing finding was presented by Simeon Djankov. Unlike Economic Freedom of the World project that spans several decades, Doing Business report is a much younger (since 2004) and more narrowly focused on the specifics of business environments rather than overall levels of economic freedom in different countries. Djankov’s research suggests that on average democracies reform more than non-democracies in all areas rated by the Doing Business report. What is more, the reform effect is more pronounced in poorer countries: the poorer the country, the more democracy matters for economic reforms. Why? One reason seems quite clear. Although in theory it is easier for a benevolent dictator to institute economic reforms, in practice such reform-minded autocrats are rare; instead, economic reforms in authoritarian countries can be much more easily undone.

That is not to say that this research establishes a directional causality and sequencing between political reforms (i.e., democratization) and economic reforms – it doesn’t. That was not the focus of the study, which looks at small-scale reforms rather than systemic changes. But it does suggest that more transparent and accountable policymaking process in democracies is more conducive to sustained step-by-step economic reforms than unpredictable authoritarian rule.

Brazil’s Entrepreneurs Afraid to Take Risks

Entrepreneurship involves risk. According to a March 6th article in the Economist, “Betting the Fazenda,” Brazilian entrepreneurs are less willing to take risk than their Chinese and Russian counterparts. What could account for this? Well it doesn’t take long to figure out why once you look at the stats from the IFC’s “Doing Business” report. Here’s what the Economist points out:

Starting a business takes 152 days and requires 18 different procedures, according to the IFC’s annual worldwide “Doing Business” study. It takes 2,600 hours for a medium-sized business to keep up with its taxes each year. The same hypothetical business would pay 69% of its second-year profits in tax, if it played by the rules and did not receive special tax breaks.

Geez!  Considering this, it makes me wonder why anyone would start a business in Brazil in the first place!  These barriers are so onerous that it is no surprise corruption is so rampant.  Overall, Brazil’s economy has been doing very well recently with a 5.1% increase in GDP in 2007 according to the IMF.  Certainly, an increase in entrepreneurship would dramatically increase Brazil’s growth and further stabilize a country that has been on the brink of economic collapse in the recent past.  This would bolster the positive democratic reforms that have been taking place.  Let’s applaud Brazil’s success, but also recognize that if they want to compete globally, there’s a lot more to do.