Doing Business Blog - The World Bank Group

Measuring Economic Freedom

Freedom is good to have, but difficult to measure. The Heritage Foundation has been doing it for more than a decade. Recently, the methodology of the Index of Economic Freedom was improved and the analysis made available for free on the web. Among the main improvements: constructing continuous indices from 0 to 100 (most free) in place of the previous discrete ones, which varies from 1 to 5; adding a category of labor freedom; linking the business freedom index to the business entry, business licenses, and business exit indicators in Doing Business; and doing regional comparative analyses.

What do the Heritage experts say about Azerbaijan, to take one example? It is the world's 107th freest economy (of 141 in the sample). Azerbaijan ’s overall score is just below the regional average. The country’s level of monetary freedom is high. Corporate tax rates enhance Azerbaijan 's score, although the government also imposes other taxes. Most of the state-owned businesses have been privatized. That and limited government spending give Azerbaijan a high “freedom from government” score. Financial freedom, investment freedom, property rights, and corruption remain problematic, as is an underdeveloped judicial system - see figure of Azerbaijan ’s scores in Heritage (2007).

The View Beyond One’s Nose

The devil is in the details. Reforms are no different. With the rising popularity of business climate reforms, countries are eagerly computerizing, digitizing or, even better, creating virtual one stop shops for anything from company start-up to licensing systems to customs. And in many cases it works. But sometimes, small grains of sand get in the way.

On a recent trip to Malaysia, the Company Registrar there described in detail the new computerized registration system. “In the near future, everything will be electronic”. But even with a brand new system, Malaysia will not compare to Denmark or New Zealand.

Why? Because company documents have to be stamped prior to registration. But, according to the Company Registrar, this is not a requirement of his agency. True. But this makes no difference to the entrepreneur who still has to make a trip to the stamp office and scan the document before enjoying the new online system. Entrepreneurs are literally on the edge between old and new. Not the most efficient system.

A Court That Wants Your Business

The light of justice shines on everybody with business in the Commercial Division of the New York Supreme Court. The picture here hints at an impressive cupola adorning the hall of the court house in lower Manhattan. In golden letters along the frieze are inscribed cultures with influence on today’s dispensing of justice. “Byzantine” can be read there, then “Frankish”. No historical parallels intended, but it seems that in the very place of the court, frank and open eventually overcame Byzantine ways in pronouncing the law.

This was not inevitable, however. The Commercial Division of the Supreme Court of the State of New York is proof that for innovative court structures, a healthy dose of competition, an equal portion of knowledge, plus a few sprinklers of city make a good recipe. Let’s see to the ingredients:

In the Lion's Mouth

“When your hand is in the lion’s mouth, be careful how you pull it out,” goes one proverb.

Three years after a brokered peace, one would think that Liberia is safely out of the lion’s mouth. UN troops continue to patrol Monrovia, aid agencies are rushing in with their checkbooks, and Liberians are starting to rebuild their businesses and their country. But looks may be deceiving.

The Liberian government recently requested advisory work to improve the country’s performance on the Doing Business indicators. The request makes sound political sense. Reform may put the Liberian government in good standing with the donors holding the purse strings. Also, investment promotion campaigns are lent much more credibility when the World Bank classifies a country as a top reformer. One only needs to flip through the Financial Times or The Economist to see the incredible marketing job that Saudi Arabia and Georgia have done with their status as top reformers.

The Ease of Getting Visas

The Schengen region expanded at 00.01 a.m. on December 21, 2007 to embrace nine new countries (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovenia, Slovakia) – the states that joined the European Union on May 1, 2004, with the exception of Cyprus. This means that governments of these nine countries are now entitled to issue common Schengen visas, which are valid for entry into almost the whole of Europe. A great step forward, though a somewhat recent obstacle facing travelers.

Paradoxically enough, the triumph of liberal thought in economics over the last decade has resulted in overall ease of business regulations, while the parallel has been the introduction of more and more elaborate visa and immigration procedures. Taken for granted today, restrictive visa and immigration regimes are actually a very recent phenomenon.

One Day in the Life of a Business

"One day in the life of Ivan Denisovich" got Solzhenitsyn a Nobel Prize in literature. The book is dull: it describes a single day of an ordinary prisoner in a Soviet labor camp in the 1950s. However, it described a reality that few had imagined.

It would be useful to have a similar account of the life of an ordinary business in, say, Africa. Many efforts have gone into improving the environment for doing business in Africa. The Doing Business team now works in over 20 African countries. The Investment Climate Facility for Africa has even more ambitious plans.

A parallel effort exists. Abhijit Banerjee and Esther Duflo at MIT Economics have a 2006 Journal of Economic Prespectives paper on the economic lives of the poor. The authors document how the poor (those who have less than $1 a day) earn their income and how they spend it in 13, mostly African, countries.

To Seal or Not to Seal

"So far as the question of putting up of the seal of the Company is concerned, it is a relic of the days when medieval barons, who could not read or write, used their rings to make a characteristic impress,” stated India’s Supreme Court as recently as 2006.

When a company is incorporated, it obtains a legal identity. It can sue and be sued, has perpetual succession (as opposed to physical persons that die), and can acquire, hold, and sell property. The company seal is the equivalent to a person’s signature, allowing company representatives to act on behalf of the company. This all sounds good. Otherwise, people might commit fraud in the company’s name, right?

We Are Number Four!

Macedonia has many claims to fame, as is evident from the minute you land in the country at the Alexander The Great airport. For example, Mother Theresa was also born in Macedonia. 

Recently, Macedonia has been priding itself on making it to the top 10 reformer list in Doing Business 2008. In fact advertisements with the message “We are number four!” ran on television for weeks surrounding the launch of the Doing Business report. Macedonia made it to number 4 of the top 10 reformers by eliminating the minimum capital requirement, speeding up time for obtaining construction permits, and improving tax administration.

Such valiant reform efforts bring Macedonia to #75 out of 178 countries on the ease of doing business. The government recently invited the Doing Business team to visit them in order to discuss possible reforms to improve their ranking further.  Allen Dennis and I visited Skopje and held successful meetings with the government to discuss possibilities for reform in the short and medium term. 

The government also briefed us on ongoing reform efforts across the 10 topics that Doing Business covers. These ranged from digitalizing the Cadastre to being able to register a company within just 4 hours.

The Argentine Opportunity

On Monday December 10th Cristina Fernandez de Kirchner took office in Argentina as the first directly elected female president of the country. This event marks the first of many. It is one of the few times, since democracy was restored in 1983, that the presidential transfer is done at the set time. On most other occasions, the leaving President resigned before the end of his mandate. It is also the first time ever that the power transfer occurs between a husband and wife.

After an impressive economic and social recovery only a few years after the 2001 crisis that hit the country hard, Argentina’s agenda is still a laundry list of to do items. The big question on many Argentine minds is: will Cristina represent lackluster continuity or will she push the country forward, closer to that ever-lasting dream of fulfilling Argentina’s grand potential?

Dismantling the License Raj

Reducing the number of business licenses in India in 1985 resulted in a 32% increase in manufacturing productivity in the next decade. So finds a study by Amalavoyal Chari, a graduate student at Yale.

The reforms took place when Rajiv Gandhi unexpectedly came to power following his mother's assassination in 1984. He was an unknown quantity - an airline pilot with no political experience. But Gandhi turned out to be a fast reformer: twenty-five industries were entirely exempted from business licensing in March 1985. In late 1985 and 1986, further reforms made licensing easier in a number of other industries.

It didn't work everywhere.