Doing Business Blog - The World Bank Group

Shattering the Glass Ceiling

For many women in the developing world, it’s not the glass ceiling that prevents them from making it to the C-suite, but rather the obstacles they face along the way. The Global Entrepreneurship Monitor (GEM), which provides an annual assessment of entrepreneurial activity at the national level worldwide, found that overall there are higher rates of female entrepreneurship in developing countries than developed countries. But this distinction is borne of necessity.

The main challenges that women face are social inequality, lack of education and trouble in securing funding. A recent study by PricewaterhouseCoopers made an interesting finding; women in developing countries find it easier to break through the glass ceiling than their colleagues in the west. Samuel DiPiazza, the company’s global head said, “In some countries such as Germany and Switzerland, there are cultural and social perceptions of women that make advancement much more challenging. Whereas in the developing world, there is a huge cry for talent, where there is enormous growth, you must be able to adjust to these norms faster.”

The Devil In the Detail

Thinking, talking and writing about regulatory and institutional reform is one thing. Implementing those reforms is a different thing. And when it comes to reform implementation, the devil is often in the detail. A Belgian devils story - not related to its national soccer team - illustrates this point.

Project “Fenix” was an ambitious project to introduce e-courts in Belgium, which would allow lawyers and court personnel to access case files online. Court cases would be transferred electronically as they travel from first instance to appeals and to the Supreme Court. Lawyers would be able to submit their court briefs by e-mail, instead of hand-delivering hard copies to the court.

Even in a small country like Belgium, more than 800,000 court decisions are passed every year. Around 40% of all the country's paperwork is generated by the justice sector.

Project Fenix started as a simple technical harmonization project, but developed into a much more ambitious undertaking. If the project had become a success, it would have served as an example to the rest of Europe.

Let the Public React

As fighting corruption is heralded as a main panacea of economic development, increased involvement of families in the politics of many countries may, at first blush, appear to increase chances of conflicts of interest. Kaczynski in Poland, Kirchner in Argentina, Abe and Fukuda in Japan. Also, the candidates: Clinton, Royal...

Corruption can be prevented through imposing restrictions, supports one approach. The World Bank, for example, prohibits employment of close relatives. It allows, however, employment of spouses/partners, as long as one of them does not report to the other.

The Doing Business approach to preventing corruption advocates disclosure of

Reforms in Business Regulation: Evidence From Russia

A new article by Evgeny Yakovlev and Ekaterina Zhuravskaya studies regulatory reforms in Russia between 2001 and 2004. Based on the analysis of 2,000 businesses over the period 2001-2006, the authors note that the reforms reduced the administrative costs of firms; but, the progress of reform had a substantial variation across Russian regions.

In particular, the reforms had better results in regions with a transparent government, low corruption, better access of the public to independent media sources, a powerful industrial lobby, and stronger fiscal autonomy. In regions that had these characteristics, Yakovlev and Zhuravskaya found a substantial positive effect on net business entry and the growth of employment in small firms.

On Transparency Policies and Politics

Ecuador’s Constitutional Assembly was in the news headlines last week. This was not primarily for the new constitution they are debating, but, rather, for the expulsion of one of its members. Opposition leader Alvaro Noboa was expelled for failing to provide his declaration of assets.

The 130 members of the Assembly had until Friday January 11th to submit a declaration of their personal assets as part of the body’s rules. According to Ecuador’s media, Noboa, who is also considered the richest man in the country, was the only member that refused to comply with the obligation. Even his wife, who is also a member of the Assembly, had complied.

Is Your Burger A Clone?

Consumers tend to prefer the right to choose. Citizens may feel the same. Access to clear and simple information tends to be the quickest path to achieve both. Making sure that it is delivered may require regulation. For example, how would you feel about eating cloned food and not even knowing about it?

As I walk down the aisles of the supermarket, and browse the different variety of products I realize I really have no idea what I am eating. So maybe I start looking at ingredients, polysorbate 60, sodium stearol lactylate, modified corn starch, calcium sulphate. What do they mean? Who knows. So I come home later and decide to run a search on Google on what I am actually going to put into my body. I discover that calcium sulphate would be transformed into plaster without the water, or phosphorus is also used to make tracer bullets glow. Tasty. What happened to simplicity?

Recovering the Most When Going Bust

Designing regulations regarding bankruptcy is not an easy task. The legislator has to balance several traditionally opposing objectives: on one side protecting creditor rights; on the other, maximizing the firm value by preventing the creditors from liquidating the firm prematurely. Countries across the world have found different solutions to this delicate balance.

Davydenko and Franks (2006) analyzed how three countries (France, Germany and the UK) addressed this issue. Using data on firms that defaulted on their bank loans in those countries from 1984 to 2003, the authors find that bankruptcy codes do matter for bank recovery rates and firm outcomes. Contrary to the traditional view, they find that protecting creditor rights and maximizing firm value are not necessarily opposing objectives. In the most creditor-friendly country of the three, the UK, both bank recovery rates and firm value are higher than in the less creditor-friendly country, France.

Wiring Willingness With Results

Russell “Stringer” Bell was a kingpin who after amassing a considerable fortune from drug trafficking wanted to start a legal business. He decided to become a real estate developer. However, he was very surprised –and upset- when it become clear to him that dealing with the local authorities was even harder, more time consuming and inefficient than dealing with his former cronies. Although this story is from the acclaimed HBO series “The Wire,” complicated bureaucracies in the construction sector are not something found exclusively on TV.

In June 2006 the Personería Urbana (an independent local agency that protects “public interests”) of Bogota had a meeting with all the urban curators (private functionaries with public responsibilities -i.e. dealing with construction licenses) of the city. After the gathering, the curators committed to a 6-month timeline for increasing the efficiency of the services they provide.

Politically Exposed Persons

Denis Christel Sassou-Nguesso, son of the Republic of Congo’s President, knows a good bargain. In June 2007, British NGO Global Witness published documents that appear to show that he may have spent hundreds of thousands of dollars on shopping sprees in Paris and Dubai. The documents show that in August 2006 alone, $35,000 on purchases from designers such as Louis Vuitton and Roberto Cavalli were charged to his credit card. This when 70% of Congo's population lives on less than a dollar a day.

Few would have heard of this case except that Mr Sassou-Nguesso's lawyers tried to block the public display of the credit card receipts on Global Witness's website. The court ruled in favor of Global Witness and the story hit the main news.

Why Is Easy Entry Good

In The Other Path, Hernando de Soto shows that the prohibitively high cost of establishing a business in Peru denies economic opportunity to the poor. In 1983, de Soto’s research team followed all necessary bureaucratic procedures in setting up a one-employee garment factory in the outskirts of Lima. Two hundred and eighty-nine days and $1,231 later, the factory could legally start operation. The cost amounted to three years of wages—not the kind of money the average Peruvian entrepreneur has at his disposal.

"When legality is a privilege available only to those with political and economic power, those excluded—the poor—have no alternative but illegality," writes Mario Vargas Llosa in the foreword to de Soto’s book.

More recently, Djankov et al (2002) has attracted the attention of researchers and development experts to the field of measuring entry regulation. Following de Soto's work, it records the number of procedures, time and cost to start a business in 85 countries. The main finding: "heavier regulation of entry is generally associated with greater corruption and a larger unofficial economy, but not with better quality of private or public goods. Entry is regulated more heavily by less democratic governments, and such regulation does not yield visible social benefits."

Taxes – A Necessary Evil?

Yes, we do need taxes to live in a society. There are goods (such as roads, security) that due to their public nature most people agree should be provided by the state. And of course the state needs to finance them through taxes. Therefore, taxes are needed. But do they need to be evil (i.e. distortionary and resulting in bad economic outcomes)?

No, they don’t. In fact, countries across the world vary dramatically in their tax policies and in economic outcomes. Furthermore, countries with lower taxes are not necessarily the ones that have worse public goods. New research on taxes by Djankov et al (2008) finds that countries with high business taxes have lower investment, lower foreign direct investment and lower business entry.

Bavaria: A Building Code Blueprint

The Czech construction market is booming and building offices find themselves swamped. Projects submitted for approval are becoming bigger and more complex. Building officers often lack the experience and knowledge to consider all technical aspects.

Sometimes they get lucky and get a moment to breathe -- the applicant might have forgotten a stamp or a document in his application. The building officer notifies the applicant of the omission and the project goes back to the bottom of the pile of applications for a couple of months.

A new Building Code became effective in the Czech Republic in January 2007. The new code attempts to privatize parts of the building control procedures. Whether the new building code will make the life of Czech building officers and construction companies easier in the future is yet to be seen, but if the experience of neighboring Bavaria, which gave inspiration to the Czech reforms, is any indication then there is reason for hope.

Getting Credit Without Loss of Generality

One of the 10 Doing Business indicators concerns the ease of getting credit. The second question of the legal rights component of the Getting Credit survey asks: "Does the law allow for general descriptions of assets, so that all types of assets can be used as collateral?" But what does this really mean? And what determines whether a country receives a score of 0 or 1 on this question?

People who read this question tend to focus on the term "general", i.e., whether collateral can be described generally. But in asking this question, Doing Business is interested more in substance than in form; the focus is not so much whether a lending agreement can describe assets generally (for example by using terms such as "all equipment" or "all inventory" to describe the collateral), but rather on what a general description can do: allow a borrower to use substantially all types of assets as collateral.

Imagine a hypothetical business owner - let's call her Simone - who owns a lumber store in Nairobi (Okay, maybe there's not an abundance of forests in Kenya, but this is a hypothetical example). Business is booming, and Simone wants to get a loan from the bank so that she can buy the store next door and expand into that space. As it happens, Kenyan law allows her to use just about everything her company owns - including her company's combined assets - as collateral to get that loan (Kenya is one of the highest scoring economies on the Legal Rights Index, earning 8 out of a total of 10 possible points).

What Makes Women Happy?

With Valentine’s Day less than a month away many people are asking "what makes women happy?" And as many often find out, there is no easy answer. In fact, it is probably becoming harder to make women happy.

Although women’s lives in the United States have improved by most objective measures (such as, female income and labor force participation), when asked if they are happy, a smaller percentage of women now answers "yes" when compared to women in the 1970s. This result is presented in “The Paradox of Declining Female Happiness” by Betsey Stevenson and Justin Wolfers of Wharton. The authors also find that women are on average happier than men, but they are becoming less happy over time relative to men.

Vietnam: A Property Market

Hoang is a successful manager of a foreign company who lives with his wife in a modest apartment in the capital of Vietnam, Hanoi. Five years ago, he bought a second apartment in an “expat” residential area for $100,000.

Loans from commercial banks were almost unavailable, so he used all his savings and borrowed from friends and relatives to pay the entire amount upfront in four installments. Hoang has been renting the apartment to a Japanese executive since then. At present, Hoang’s apartment is worth three times more. He is confident that he could easily sell it for more than $300,000 now, if he would.

Hundreds of construction sites are mushrooming in Hanoi. The real estate market is booming. Middle-class and new riches nationwide pour money in real estate, considering it the safest haven for their personal savings. New apartment complexes, hotels and storehouses are changing the city’s landscape. Last week, the Hanoi People’s Committee gave green light to three new five-star hotel projects. The construction delirium has brought hundreds of young people from the countryside to work on the scaffold. Their remittances are already a critical resource for their impoverished provinces of origin.

Singapore: Making It Easier Even for Lawyers

As we travel around the world, the Doing Business team visits government authorities and institutions. An inevitable visit is to the courts. I was amazed when I arrived to the so-called “UFO building” -- the new building of the Supreme Court of Singapore. It is called the UFO building because of its particular futuristic shape.

Upon my arrival, I realized that something was strange. There were no lines in order to present cases to a judge, and everything was calm and organized. I thought I was at the wrong place. But no, I was in a real court!

In Singapore, the number 1 ranked country in the ease of doing business for the second year running, when lawyers go to court, they do not need to stand in lines anymore. When they arrive, they go directly to a computer where they sign in and receive a ticket which clarifies the time and location where they should present their cases.

One Strike and You're Out of Business

On October 17, 1993, 16 West African states signed a treaty known as the "Organisation pour l'Harmonisation du Droit des Affaires en Afrique" or "OHADA" (Organization for the Harmonization of Commercial Law in Africa). The objective of the organization is to promote African economic integration and attract investment to the region. In an effort to harmonize laws, the member states have adopted "Uniform Acts" in areas such as corporate law, bankruptcy, accounting and debt recovery.

In 1998, the 16 OHADA countries -- soon 17 when DRC Congo joins the club -- adopted a "Uniform Act on General Commercial Law" which governs business registration. Article 10 of the Act states that "people who have been convicted of a crime as well as people who have been imprisoned for at least 3 months for committing economic or financial offenses are excluded from becoming an entrepreneur." This provision was meant to protect society by excluding criminals from doing business.

The Doing Business project counts 24 countries (out of 178) that still require company founders to submit a criminal record when they want to register their business. Out of the 24, 16 are the OHADA member countries. The remaining 8 are Algeria, Kuwait, Burundi, Djibouti, Macedonia FYR, Slovakia, St Kitts, and the Czech Republic. In Kuwait, for example, you cannot even hold shares in a company without a clean criminal record. These laws sharply contrast with countries like the United States and the United Kingdom where some cities have training programs and give financial support to convicts -- while still in prison --to help them start a business when they get out.

Top Reformers and Inverse Relationships

The author is a member of the Doing Business team and a Kenyan national.

A main finding of Doing Business 2008 is that return on investment is directly proportional to the pace of reforms. Ironically, this will not be the case for Kenya, at least not in the short term.

A top Doing Business reformer, and long billed as one of Africa’s beacons of peace and prosperity, Kenya is currently reeling from the effects of a violent reaction to a disputed presidential poll result in which widespread civil unrest, loss of life and property and paralyzed transport have become commonplace. Imports are stuck in Mombasa, while shops are empty.

What's Wrong With Experience?

Governor Bill Richardson posed the question "What's wrong with experience?" to voters during the January 5th debate of U.S. Democratic candidates for president. He is trailing in the polls despite having the most experience among all the candidates. In fact, the results in early contests show an inverse relationship between experience and popularity with US voters: the more time a candidate had spent in government, the fewer votes he or she receives.

Change, reform—those are the keys of this election. Americans are nervous about the United States’ slip in global competitiveness and the continual drop of the dollar. They fear their jobs will go overseas and their children won’t have the opportunities that they had when growing up. Experience—the politician’s ability to do things as they’ve always been done—has little value for this electorate.

There is empirical support for the American voters’ intuition. Doing Business 2008 found that investment returns are highest in those countries that reform the most. Where investors saw policymakers actively working to improve the country’s business climate, they were more likely to reward that country’s companies with cash. In turn, investors tended to skip over companies from countries with fewer reforms. Investors, much like voters, don’t often reward the status quo.

Is Your Country DB Fit?

A Happy New Year! Yes, it’s a time to make a New Year resolution. The latest invention from Japan is “Wii Fit” – it’s a Nintendo’s virtual fitness program that combines self-improvement through fun of playing games, healthy competition and mutual support among a community of participants.

In many regards, Wii Fit resembles the Doing Business (DB) process. In Wii Fit, participants have to go through a reality assessment check (sometimes a surprising and harsh result that is hard to accept) to set a benchmark. Once you recover from the brutal reality, based on the initial assessment, participants embark on various types of exercise to help them achieve “balanced” health (flexibility, balance, reflex, correct breathing, metabolism, building external as well as internal muscles) with advice and support from a virtual trainer.

Top Reformer Wins Election in Georgia

Mikhail Saakashvili won the presidential election in Georgia on Jan. 5. Preliminary results suggest he got about 53% of the vote, enough to avoid a run-off.

Since 2004, when Saakashvili won his first mandate, Georgia has been the fastest reforming economy according to Doing Business. For three years running, it appeared in the top-10 reformers' list; and was the top reformer in Doing Business 2007. In 2004-2007, Georgia's rank on the ease of doing business jumped from 137 to 18.

Women Entrepreneurs: Obstacles Overcome

Kiran Mazumdar Shaw started her business with Rs. 10,000 of capital in her garage. Her applications for loans were turned down three times due to gender discrimination from banks in India. In 1978 she founded the company Biocon India and is the richest woman in India today.

Surprisingly enough, there are still only about 9% of women in India who participate in ownership of a firm according to the World Bank Enterprise Survey data. Like Kiran’s story, Doing Business would like to hear about the many women entrepreneurs who may not be in the spotlight, but who have faced and overcome such obstacles as Kiran did in establishing her businesses.

High Entry Costs Reduce Productivity

It is common sense that if it costs a lot to start a new business, few businesses will start up. How high entry costs affect the productivity of existing firms is less obvious.

A new paper , by Levan Barseghyan at Cornell, looks at the effect of high entry costs on productivity and output. The main finding: "an increase in entry costs by 80% of income per capita, which is one half of their standard deviation in my sample, is estimated to decrease total factor productivity and output per worker by 22% and 29%, respectively." The analysis is done for over 100 countries.

The effect is quite large. It suggests that if Burkina Faso were to eliminate all entry costs (currently equal to 82.6% of income per capita, workers would be a third more productive. Why is that?

Measuring the Ease of Enterprise

The field of measuring the ease of enterprise is maturing. In 2001, a dozen organizations put together indicators and ratings of the environment for doing business. Six years later, four have overtaken the rest and become the source of information for reformers in government, for investors and researchers. These come from the Fraser Institute’s Economic freedom of the world, the Heritage Foundation’s Index of economic freedom, and the World Bank’s Doing Business project and Enterprise surveys .

A new paper shows a clear trend: moving from indicators constructed by commercial entities—as a side business for their clients—to indicators constructed by organizations that provide a public good. This has brought in improved methodologies and better sources of information. It has also resulted in an innovation: aid flows or advisory services informed by measurement of the ease of enterprise. The United States’ Millennium Challenge Account is the pioneer in this market.

Out of Court: Business Entry in Bulgaria

Starting today (January 2), an entrepreneur establishing a business in Bulgaria would not go to the court. Instead, he will visit the newly-established trade registry.

This reform is long overdue: the original date was supposed to be December 2006. It was delayed to July 2007, and again for another six months. With each delay, the deputy minister responsible for the establishment of the trade registry resigned. If another delay takes place, the minister of justice has pledged she would resign too.

Strictly speaking, the earliest the registry would open for business is on January 20. This is due to a time-honored tradition: each year judges and court clerks have 6 weeks off starting mid-December to "clean the inventory of cases." These are currently kept on paper only despite an existing electronic system that can easily accommodate the information.