Thursday, October 24, 2019 / 10:18 AM / By World Bank Group / Header Image Credit: World Bank Group
At its core, regulation is about freedom to do business. Regulation aims to prevent worker mistreatment by greedy employers (regulation of labor), to ensure that roads and bridges do not collapse (regulation of public procurement), and to protect one's investments (minority shareholder protections). All too often, however, regulation misses its goal, and one inefficiency replaces another, especially in the form of government overreach in business activity. Governments in many economies adopt or maintain regulation that burdens entrepreneurs. Whether by intent or ignorance, such regulation limits entrepreneurs' ability to freely operate a private business. As a result, entrepreneurs resort to informal activity, away from the oversight of regulators and tax collectors, or seek opportunities abroad-or join the ranks of the unemployed. Foreign investors avoid economies that use regulation to manipulate the private sector.
By documenting changes in regulation in 12 areas of business activity in 190 economies, Doing Business analyzes regulation that encourages efficiency and supports freedom to do business.1 The data collected by Doing Business address three questions about government. First, when do governments change regulation with a view to develop their private sector? Second, what are the characteristics of reformist governments? Third, what are the effects of regulatory change on different aspects of economic or investment activity? Answering these questions adds to our knowledge of development.
With these objectives at hand, Doing Business measures the processes for business incorporation, getting a building permit, obtaining an electricity connection, transferring property, getting access to credit, protecting minority investors, paying taxes, engaging in international trade, enforcing contracts, and resolving insolvency. Doing Business also collects and publishes data on regulation of employment as well as contracting with the government (figure O.1). The employing workers indicator set measures regulation in the areas of hiring, working hours, and redundancy. The contracting with the government indicators capture the time and procedures involved in a standardized public procurement for road resurfacing. These two indicator sets do not constitute part of the ease of doing business ranking.
Research demonstrates a causal relationship between economic freedom and gross domestic product (GDP) growth, where freedom regarding wages and prices, property rights, and licensing requirements leads to economic development.2 Of the 190 economies measured by Doing Business 2020, land registries in 146 lack full geographic coverage of privately owned land.
All privately held land plots are formally registered in only 3% of low-income economies. Overall, on the registering property indicator set, 92 economies receive a score of zero on the geographic coverage of privately owned land index, 12 on the transparency of information index, and 31 on the reliability of infrastructure index. Globally, property registration processes remain most inefficient in the South Asia and Sub-Saharan Africa regions.
Doing Business 2020 shows that effectiveness of trading across borders also varies significantly from economy to economy. Economies that predominantly trade through seaports incur average export border compliance costs as high as $2,223 per shipment in the Democratic Republic of Congo and $1,633 in Gabon compared to only $354 in Benin and $303 in Mauritius. Similarly, documentary compliance costs surge to $1,800 in Iraq, $725 in the Syrian Arab Republic, and $550 in The Bahamas. It is important to note, however, that high costs in Iraq and Syria are also attributed to fragile political, social, and economic conditions. Export border compliance times for maritime transport range from 10 hours in Singapore to over 200 hours in Cameroon and Cote d'Ivoire. According to Doing Business 2020 data, ports are most efficient in Organisation for Economic Co-operation and Development (OECD) high-income economies and least efficient in Sub-Saharan Africa. Substantial further reform efforts are warranted to spread efficiency to economies where businesses still struggle to trade.
Business Regulation: Benchmarking
Business benchmarks aspects of business regulation and practice using specific
case studies with standardized assumptions. The strength of the business
environment is scored on the basis of an economy's performance in each of the
10 areas included in the ease of doing business ranking (table O.1). This
approach facilitates the comparison of regulation across economies. The ease of
doing business score serves as the basis for ranking economies on their
business environment: the ranking is obtained by sorting the economies by their
scores. The ease of doing business score shows an economy's absolute position
relative to the best regulatory performance, whereas the ease of doing business
ranking is an indication of an economy's position relative to that of other
economies. Doing Business 2020 acknowledges 22 reforms in the 20 top-ranking
economies. Since 2003/04, the 20 best-performing economies have carried out a
total of 464 regulatory changes, suggesting that even the gold standard setters
have room to improve their business climates. More than half of the economies
in the top-20 cohort are from the OECD high-income group; however, the top-20
list also includes four economies from East Asia and the Pacific, two from
Europe and Central Asia, as well as one from the Middle East and North Africa
and one from Sub-Saharan Africa.
Conversely, most economies (12) in the bottom 20 are from the Sub-Saharan Africa region. Encouragingly, several of the lowest-ranked economies are actively reforming in pursuit of a better business environment. Over the past year, Myanmar introduced substantial improvements in five areas measured by Doing Business-starting a business, dealing with construction permits, registering property, protecting minority investors, and enforcing contracts. This ambitious reform program allowed the country to rise out of the bottom 20 to a ranking of 165. In contrast to the economies ranked in the top 20, however, the bottom 20 implemented only 10 reforms in 2018/19.
Economies that score highest on the ease of doing business share several common features, including the widespread use of electronic systems. All of the 20 top-ranking economies have online business incorporation processes, have electronic tax filing platforms, and allow online procedures related to property transfers. Moreover, 11 economies have electronic procedures for construction permitting. In general, the 20 top performers have sound business regulation with a high degree of transparency. The average scores of these economies are 12.2 (out of 15) on the building quality control index, 7.2 (out of 8) on the reliability of supply and transparency of tariffs index, 24.8 (out of 30) on the quality of land administration index, and 13.2 (out of 18) on the quality of judicial processes index. Fourteen of the 20 top performers have a unified collateral registry, and 14 allow a viable business to continue operating as a going concern during insolvency proceedings.
The difference in an entrepreneur's experience in top- and bottom performing economies is discernible in almost all Doing Business topics. For example, it takes nearly six times longer on average to start a business in the economies ranked in the bottom 50 than it does in the top 20. Transferring property in the 20 top economies requires less than two weeks, compared to about three months in the bottom 50. Obtaining an electricity connection in an average bottom-50 economy takes twice the time that it takes in an average top-20 economy; the cost of such a connection is 44 times higher when expressed as a share of income per capita. Also, commercial dispute resolution lasts about 2.1 years in economies ranking in the bottom 50 compared to 1.1 years in the top 20. Notable differences between stronger and weaker performing economies are also evident in the quality of regulation and information. In the top 20, 83% of the adult population on average is covered by either a credit bureau or registry, whereas in the bottom 50 the average coverage is only at 10%.
What do Doing Business 2020 data show?
low-income economies achieve higher levels of economic efficiency, they tend to
reduce the income gap with more developed ones. One study quantifies the
relationship between the regulation of entry and the income gap between
developing countries and the United States. It shows that substantial barriers
to entry in developing economies account for almost half of the income gap with
the United States.3 These barriers prevent growth and result in persistent
poverty. Encouragingly, Doing Business 2020 continues to show a steady
convergence between developing and developed economies, especially in the area
of business incorporation (figure O.2). Since 2003/04, 178 economies have
implemented 722 reforms captured by the starting a business indicator set, either
reducing or eliminating barriers to entry. In all, 106 economies eliminated or
reduced minimum capital requirements, about 80 introduced or improved one-stop
shops, and more than 160 simplified preregistration and registration
formalities. More remains to be done, however. Despite this convergence, Doing
Business 2020 data suggest that a considerable disparity persists between low-
and high-income economies on the ease of starting a business. An entrepreneur
in a low-income economy typically spends about 50.0% of income per capita to
launch a company, compared to just 4.2% for an entrepreneur in a high-income
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