Doing Business Blog - The World Bank Group

Pernicious Aid Dependence

Foreign aid can be the kiss of death for poor regions. This is what Amity Shlaes (picture), senior fellow at the Council on Foreign Relations in New York, argues in her article of February 27, 2008 on Bloomberg. This makes sense when you consider that aid obviates the need to tax, says Shlaes. "Governments that don't need to collect taxes don't need voter support either. They also don't need to produce an environment friendly to business. Those who benefit from a windfall turn to autocrats."

More importantly, aid tends to make politicians forget about growth. Bill Easterly, the most vocal opponent of aid dependence, describes an encounter with an HIV-positive woman in Soweto, where AIDS flourishes. When asked what the area's worst problem was, the woman replied "no jobs."

Shlaes' article concludes: "you should expand aid if you want to make Africa look more like the Middle East -- a bit healthier, but fundamentalist, non-entrepreneurial and bellicose. That's one flawed gift."

The M-Word

The Economist recently ran a special report on technology and government (see picture). The report provides valuable lessons on the way developed countries harnessed the use of technology to better provide public goods, foster democracy, reduce corruption and cited examples of what poor countries could do to catch up.

Basic to the Doing Business project has been the advocacy of minimal personal contact with officials, notaries, lawyers in favor of greater use of technology in doing business.

Best practices from the Doing Business Starting a Business indicator recommend completing registration procedures online. Not only to save money, time and efforts of starting up businesses but also empower people to pursue their business ideas free from the potential of being asked for bribes. Technology also offers a tool to monitor government efficiency and transparency and thus put pressure on the government to better function. The government too benefits from increased revenues and enhanced public satisfaction with governance.

Easterly on Gates

Bill Easterly (picture), formerly of World Bank fame, always manages to ruffle the establishment. This time the establishment is Bill Gates, the philanthropist extraordinaire. Gates recently told the Wall Street Journal that he hated Easterly's latest book. Easterly was eager to respond.

The gist of Easterly's argument is that the profit motive of capitalism is stronger - and more effective in reducing poverty - than the philanthropy motive of donors. To quote Easterly: "Mr. Gates seems to believe that the solution is to persuade for-profit companies to meet the poor's needs by boosting the "recognition" of corporate philanthropy. But the dossier of historical evidence to suggest this would work is as thin as Kate Moss on a diet. ... Is it really the poor's only hope that the Gap will donate a few pennies per sexy T-shirt for AIDS treatment in Africa?"

Santa Claus Comes to Town

In a speech prior to the European Convention on the Future of Europe in 2002, the former Romanian Minister of Public Information commented that most Romanians viewed the European Union in four distinct ways: Santa Claus with his bag full of goodies; a museum with free movement; a big supermarket; or a rolling stone threatening to crash them.

As a result of European Union (EU) accession, Romania will receive a financial boost of approximately 19.667 billion Euros. This sum will be spent under the 2007-2013 program. The goal of this program is to pursue one of the Union’s enshrined missions, namely, to reduce disparities between levels of development in various EU regions.

Seven operational programs were set up last year including in economic competitiveness, regional development, transportation, environment, human resource performance, administrative capacity and technical assistance.

When Cold Winter and Energy Shortage Meet

Crossing streets in Khudjent, the northern capital of Tajikistan, can be a risky enterprise. One has a dilemma of either freezing in cold that runs down to as low as 20 below zero, or being run down by cars. “This year's cold is unbelievable. One thing is to come from freezing weather outside and warm up inside the house. But when you come home into a yet worse cold, that is devastating,” claims Rahim Aka – a taxi driver.

Unprecedented winter made people start using more electricity thus overloading the old Soviet infrastructure. Politicians decided to introduce a so-called “fan blackout”. “It is bad enough coming home in the evening and having barely an hour to feed oneself before electricity is turned off at 9pm. But also, we have only one hour of power in the morning between 7-8 am, barely enough time to shower and heat a cup of tea,” continues Rahim Aka.

Colombia: “We Can Do Better”

“We can do better” was Colombian President Alvaro Uribe’s favorite phrase during the launch of Doing Business Colombia 2008 on January 30 in Bogota.

He is right. During the event, the results of the sub-national study that compared the ease of doing business in 13 cities in Colombia showed that smaller municipalities like Pereira, Manizales or Bucaramanga are doing better than Bogota, the city that represents Colombia in the global ranking.

Bogota does not lead in any of the 5 indicators covered in the Colombian study (starting a business, registering property, paying taxes, trading across borders and enforcing contracts). And, in the case of enforcing contracts it ranks last. For example, in Bogota 1,354 days are needed to resolve a commercial dispute, whereas only 422 days are required in Villavicencio.

This is why, encouraged by the findings of this report, the Colombian government started an initiative lead by the National Planning Department, the office of the High Commissioner for Competitiveness and the Ministry of Commerce, Industry and Tourism, to improve the business environment across the country.

A Picture Worth A Thousand Words

As part of the on-going Doing Business research on transparency, I have come across very interesting anti-corruption material and web-pages. After surfing many public institutions' sites, I noticed that governments tend to take an arid approach when presenting anti-corruption content. Complicated words, not very dynamic web pages, and weak educational content for their citizen are quite common. This seems to make complete sense considering the seriousness and sensitivity of the topic. But, they always left me wondering if there could be a way of dealing with anti-corruption issues in a more user-friendly manner.

My wondering found a pleasant response while surfing the Anti-Corruption Commission web-page of the Royal Government of Bhutan. More specifically, while browsing through the pages of their last annual bulletin. With an Anti-Corruption Act that was recently approved in 2006, this country seems to be making an important push to ensure the law’s full implementation and overall compliance. What you see here is the poster that accompanied the reminder of the deadline to submit the required asset declaration for public officials.

Four Years Early or Four Decades Late?

One EU objective is to cut administrative hurdles for businesses by 25% in 2012. You can hear the business cheer. Cutting red tape is not easy anywhere, but having bureaucrats on the private sector side gives hope to the skeptics. The European Commission created a Fast Track approach to simplify many regulations and procedures for entrepreneurs. Here, Fast Track means that those procedures that can be reduced or eliminated the fastest will be tackled first.

One of the sectors that will see an early impact of this objective is the transportation sector. Last month, the European Parliament adopted the European Commission’s proposal to reduce the paper work that transport companies have to deal with.

EU Executive to Shake up Notaries Services

Last week, the European Commission (EC) published a landmark study by the Centre of European Law and Politics at Bremen University. Legal fees are a small fraction – between 0.34% and 2.94%- of an average real estate transaction, but vary widely across EU member states.

Among other interesting results, this study shows that I would be paying three times more in legal fees in France than in the Netherlands for the same €250,000 house. Why would my French friends be willing to pay more for the same service?

The European Commission is not opposed to all regulation of professional services if there are legitimate arguments for it, e.g. consumer protection. But it requires a strict proportionality test to justify a more restrictive regulation. Not meeting this test could jeopardize the basics of the European single market.

Kyrgyzstan: Number 53?

During a meeting with private sector in January, the President of Kyrgyzstan publicly admonished the Government for being passive at improving the investment climate of Kyrgyzstan. He reproached his ministers for not paying attention to all sorts of ratings of international institutions. Doing Business was one that he specifically cited and asked the ministers to focus on.

Soon thereafter, the Minister of Economic Development, defending his policies before the Parliament of Kyrgyzstan seconded the President, but was bolder in his projections. He said that Kyrgyzstan can aim at being ranked number 53 in Doing Business 2009.

Kyrgyzstan has until recently been at the forefront of economic reform in Central Asia. However, political realities stalled the economic agenda for a while. Today, a desire to improve the business environment has been revived. This week, the Kyrgyz Prime Minister reached out to Doing Business, but did so in an unusual way: through a popular newswire websites - making its commitment to business regulatory reform public.

This Seat Has Been Taken

In 2003, Norway introduced legislation which mandated all companies to fill the seats on their boards of directors with women by January 1, 2008. The law required publicly listed corporations to have at least 40% of women on their boards or close their doors to business. As a result, approximately 38% of board members are now female compared to 15.5% when the legislation was first introduced.

By 2008 the goal to have more women in the boardroom had been met, and not a single company was closed for non-compliance.

                                                                               (picture from 50/50 Leadership)

Financial Crises, Scandals and Protecting Investors

During the last months, the US subprime crisis has been a major subject of headlines worldwide. In response to this debacle, shareholder activism may surface through legal actions against individual directors or CEOs involved in the crisis. This scenario will not be limited to the United States, since many financial institutions worldwide are also affected. For example, French banks recently declared important financial losses related to the subprime crisis.

At this point, many questions could surface. How did the crisis occur? Was it a result of normal business risk or a poorly regulated and predatory sector? How can these situations be prevented?

Historically, one of the main engines of reform toward enhanced protection of investors and corporate governance, in general, has been big corporate scandals and financial crisis. For example, after the WorldCom and Enron scandals, the United States reformed its regulations in order to prevent such scenarios from repeating. After the 1997 Asian financial crisis, many of the countries of the region with developed capital markets reformed their laws.

With Power Comes Accountability

Bugattis paid for in cash at more than 1million Euro a piece. Mansions in Paris. Villas in Nice…

This is not the latest James Bond movie, but the beginning of a long list of properties and bank accounts in the name of five African heads of state and their close relatives. The list of assets was published by Le Monde last week on an investigative expose about an ongoing inquiry by the French Office on Grand Financial Crimes. The presidents of Angola, Burkina Faso, Gabon, Congo, and Guinea are the target of the investigation. The article describes at length how they own a large number of real state properties in some of the nicest and most expensive neighborhoods in Paris and other French cities.

How to be a President? Study Economics

In a new display of the power of economics, two economists are battling for the presidency of the Czech Republic.

Vaclav Klaus, the incumbent, was the first post-communist minister of finance and then a prime minister for much of the 1990s. Klaus was behind the mass-privatization reforms in Czechoslovakia and later in the Czech Republic. Jan Svejnar, the challenger (see picture), is an economist at the University of Michigan.

Their wives are economists too. Katherine Terrell, Svejnar's wife, teaches labor economics. She was also this blogger's PhD thesis advisor. Livia Klausova is a former president of the Czech Economics Association.

After three rounds of voting, the last one yesterday, neither Klaus nor Svejnar have reached the required majority. Voting resumes next Friday. Whoever wins, economics thinking will be brought into politics in Prague for another 5 years.

This gives me pause. You see, my wife is an economist too.

Declaring Assets, Liabilities and Babysitting

Asset and business interest disclosure for policymakers is an area of ongoing research of the Doing Business team. In the course of obtaining information on national legislation, I came across an interesting article on Colorado’s disclosure law for public officials. It is a good illustration of some of the challenges of disclosure legislation and entails useful lessons for both regional and national legislations across the world.

At first glance, the law looks like a textbook example. It requires officeholders to disclose their sources of income, financial assets, real estate, directorships and business interests. The disclosures must be submitted on an annual basis and are made available to the public. Transparency at its best, or so you might think!

How To Help Entrepreneurs

A recent NBER conference on International Differences in Entrepreneurship brought together two dozen researchers in this rapidly expanding field.

One of the most interesting papers at the conference was presented by Silvia Ardagna (Harvard) and Annamaria Lusradi (Dartmouth). The paper looks at what makes people decide to become entrepreneurs. In terms of personal characteristics, entrepreneurs are more likely to be male, to have a higher level of education and income, and to have more confidence in their skills and abilities and less fear of failure than other (salaried) respondents. These results are consistent with the evidence from other studies, for example a study on Brazil.

Stealing Electricity - Risky Business in India

In India, as in many other countries, there is a nexus between power company employees and those (often commercial establishments) who would steal electricity (either through tapping of overhead transmission lines, meter tampering or under-billing). In the past, most of these culprits, with or without political and financial clout, used to get away with it. Not so anymore. Stealing power has now become a punishable offense in India, and power utilities are now pulling out all the stops to prosecute the culprits.

Electricity theft has long been rampant in most parts of India (the annual losses due to electricity theft is estimated to be US$ 4.5 billion, about 1.5% of GDP) and the capital city of India, Delhi is not far behind.

Until 2002, Delhi's power supply came from Delhi Vidyut Board (DVB), a state-owned power enterprise, which was known for its less than robust customer service and inefficient staff. This was in addition to transmission and distribution losses of 50% thanks to a large number of un-metered and illegal customers, under-billing and poor collections.

Wedding Regulation and Boosting Savings

Wedding ceremonies and dowry tend to have a direct effect on how soon poor people can alleviate their plight. Or, so the Government of Tajikistan seems to be showing. To regulate such a private matter, it passed a law in the summer of 2007 "On Streamlining Traditions, Celebrations, and Rituals in Republic of Tajikistan". It even created a special state body- Department for Streamlining Traditions and Customs of Executive Office of President of Republic of Tajikistan.

The Law regulates diverse issues such as funerals and birthdays. It limits the number of people that can be invited to a wedding, and forbids the celebration of promotion and appointment to state related jobs, for example. This is a difficult task not only in Tajikistan but in the whole of Central Asia, where respect is earned through sharing joyous occasions with numerous friends and relatives.

Taxes in Benin - Then and Now

It might not seem unusual to hear an entrepreneur complain about taxes. Indeed, it would be most unusual if you would meet one that does not. However, do modern-day entrepreneurs in Benin have more reason to complain than their ancestors in the pre-colonial kingdom of Dahomey?

The pre-colonial kingdom of Dahomey (in the south of modern-day Benin) had a tax system in place that rivaled that of any modern-day western country (whether this is something to be proud of is another matter, of course). Let’s have a look at how their tax system compares to what Doing Business measures today: number of taxes, tax rates and time required to pay the taxes.

First, today there are 15 different taxes in Benin ranging from the corporate income tax to the tax on the collection of dirt. In Dahomey, traders would have sympathized. They had to endure separate taxes on the sales in markets, on entries into the kingdom, on the crossings of rivers, on agricultural production and on cash incomes (in addition to the inheritance tax and the flat tax on all adult males). (Edna Bay, Wives of the Leopard: Gender, Politics, and Culture in the Kingdom of Dahomey, p.122)

Can Electricity Be Weighed in Gold?

There are very few businesses that do not depend on electricity. Shoe-shiners and rickshaw drivers are such rare exceptions. Pretty much every other business needs electricity. Some businesses, however, need enormous amounts of electricity: aluminum smelters, for example, or mines.   

In South Africa, the gold and platinum mining industry alone accounts for 15% of the national electricity consumption. On January 25th the sector experienced a huge shock when the state-owned electric utility Eskom informed the big mining companies that it could only provide for 50% of the mines’ usual needs for the months to come. The consequence? Mines had to be shut down. You don’t want your miners stuck hundreds of meters deep below the surface and see the light suddenly go off.

Repercussions could also be felt outside the country. South Africa being the largest producer of platinum in the world and the second largest gold producer, prices for those two metals went through the roof at the Bullion Market in London.

Cashing In on Property Rights

Hernando De Soto argues that property rights are the pillars of developed economies. After a significant publication in 1989, “The Other Path - The Invisible Revolution in the Third World”, he was hired by governments around the world to advise on capital creation.

Informal (unregistered) property in Egypt, according to De Soto, is valued at $241 billion – an amount comparable to 55 times the foreign direct investment that the country received over the last 200 years (including Suez Canal and Aswan Dam), or 30 times the size of the Cairo stock exchange. This, of course, is according to De Soto.