Doing Business Blog - The World Bank Group

Reforming Italy’s Old Insolvency Regime

The long-awaited radical overhaul of Italy’s arcane insolvency regulations came into force when in 2006, parliament replaced a once notoriously cumbersome body of procedures with one resembling key provisions of Chapter 11 in the United States. The new process favors corporate restructuring over the finality of liquidation and strengthens lenders’ rights to stimulate freer flow of credit to small and medium sized firms.

With momentum for reform languishing on the parliamentary agenda for over five years, the financial crises that rocked some of Italy’s leading corporate giants—highlighted by Parmalat’s near overnight demise in 2003—finally brought to bear sufficient political pressure to significantly revisit the bankruptcy law for the first time since 1942. Comprehensive reform saw the light of day when the final set of 2006 regulations demolished the old law’s outdated criminal liability provisions.

Chinese Tales

Andres Oppenheimer's latest book, Chinese Tales, advances a basic proposition: Latin America is falling behind the rest of the world in competitiveness. He gives many examples, from the declining share in global trade to the rapid relocation of the headquarters of many Latin American businesses to Miami.

I am reading the book while on vacation in Fort Lauderdale, Florida. Oppenheimer's argument is especially obvious in this city. Here is how.

This is my first visit to Fort Lauderdale and I was surprised to see the big build-up in hotels and housing. Ever the economist, I have been asking around why. The answer: Miami is getting very expensive and vacationers and retirees are moving looking further north. Only a 20-minute drive from Miami, Fort Lauderdale is benefiting from this migration. There is a new Hilton (I am staying here and like it), new Sheraton, and a nearly-completed Trump Tower. Many new condo buildings too.

Going Portable in Phnom Penh

Up until last year, entrepreneurs in Cambodia who sought to obtain loans to expand their businesses might have found themselves coming up against a brick wall. As the country had no secured transactions law, an entrepreneur—particularly a small or medium-sized one—would likely have found himself with little to offer potential lenders in the way of collateral.

Land was acceptable as collateral—that is, if the entrepreneur was fortunate enough to own any.

Tangible movable property (such as the sewing machines of a clothing maker) was also acceptable—if the entrepreneur handed the property over to the lender. Of course, this would effectively deprive her of her business and negate the whole reason for getting a loan in the first place.

All this changed with the enactment of the country’s new Law on Secured Transactions in 2007. While Doing Business is still evaluating the impact that the new law will have on Cambodia’s score in the Legal Rights index of the Getting Credit indicator, the law looks to be a giant step forward. It creates a Filing Office within the Ministry of Commerce in which lenders can register their security interests in movable property.

The Friedman Prize, Again

Yesterday's blog talked about the upcoming selection of the biennial Milton Friedman prize for advancing liberty. I gave the most obvious choices to win it this year. The write-up got me thinking on something else.

There should be an additional criterion on who gets the prize. Two criteria, in fact. The first one is that the nominees should still be active, in the sense that the prize can help them further pursue their work. On this criterion, the first and second winners (Peter Bauer and Hernando de Soto) have failed. Peter Bauer's untimely death only weeks after he received the Friedman prize made it impossible for him to raise its profile. Hernando de Soto has also done little to advance the cause of economic liberty since 2004. The only winner who fits this criterion to-date is Mart Laar, the 2006 winner.

The Friedman Prize

On May 15, Cato Institute will announce its biennial selection for the Milton Friedman prize for advancing liberty. Previous recipients include Hungarian-born Peter Bauer, Peruvian Hernando de Soto and Estonian Mart Laar.

The choice for the 2008 recipient is straightforward: select either a New Zealander or an East European. In the past 25 years, these are the only two places where economic liberty has been significantly advanced. The choices are: Vaclav Klaus, the Czech president; Leszek Balcerowicz, who just recently finished his term as president of the central bank in Poland; Roger Douglas and Ruth Richardson, both former finance ministers in New Zealand.

The Credit Crunch in Zambia

Commercial banks - mostly subsidiaries of foreign banks - are the most dominant financial institutions in Zambia. The banking system is comprised of 14 commercial banks, holding 90 percent of financial assets. Foreign equity participation is significant, accounting for three quarters of the banking system capitalization with regional leaders such as Standard Chartered, Barclays or Stanbic controlling a sizable part.

However, a financial sector diagnostic carried out by the World Bank Group noted that by the end of 2005, credit to the private sector by banks represented only 8% of GDP in 2005. Furthermore, only 5,000 people hold 90% of loans, and just 8% of Zambia's adult population had a bank account as of 2005.

Variable or Fixed? Do the Math...

The Starting a Business indicator includes a measure for the cost of starting a business. One of the costs Doing Business measures is the registration costs. Whereas one may think that the process of company registration itself can (or should) be similar in countries, the cost of this procedure can be as different as night and day.

During a recent trip to Guyana, I found out that entrepreneurs there are hopeful, as they may have a simpler task the next time they visit the Deeds Registry (see picture) to register their company. The Minister of Finance recently stated in his speech on the Budget for 2008 that a restructuring was planned which would remove part of the variable element of the registration fees and therefore reduce the cost of registering a company or increasing share capital. Other countries have also done this. In 2007, Sri Lanka introduced a flat registration fee. Egypt also included a flat fee system for the registration of property, which led to an approximate 28% increase in revenue.

The Age of Milton Friedman

Andrei Shleifer (Harvard) has recently finished a short paper with this title, forthcoming in the Journal of Economic Literature. In it, he reviews two recent books: A collection of papers edited by Leszek Balcerowicz and Stanley Fischer; and a volume by Joseph Stiglitz, Jose Antonio Ocampo, Shari Spiegel, Richardo French-Davis, and Deepak Nayyar. Shleifer's article also pores over large amounts of recent data to come to the following conclusion: "In the Age of Milton Friedman, the world economy expanded greatly, the quality of life improved sharply for billions of people, and dire poverty was substantially scaled back. All this while the world embraced free market reforms."

What do the two books say about the age of Milton Friedman? Balcerowicz-Fischer conclude: "reliance on market forces within an open economy in a stable macroeconomic environment, with assured property rights, are the keys to rapid economic growth." Milton Friedman - as Professor Shleifer notes - would have put it better, but with the same idea.

Credit Registries: Public or Private?

Credit registries are institutions that collect and distribute credit information on borrowers. By sharing credit information, they help lenders assess risk and allocate credit more efficiently. They help good payers differentiate themselves from the bad ones, awarding good payers (even if they are poor or lack collateral) with easier and cheaper access to formal credit.

Credit registries free entrepreneurs from having to rely on personal connections when trying to obtain credit.

Credit registries can either be public institutions or for-profit private companies. Private bureaus distribute broader credit information. Public credit registries are located in general within the Central Bank and are mostly focused on bank supervision and the control of systemic risks in the financial system. Private credit bureaus are focused on providing useful credit information to lenders, so they can properly evaluate the creditworthiness of potential borrowers.

FIGURE 1: PRIVATE BUREAUS DISTRIBUTE BROADER CREDIT INFORMATION Source: Doing Business database. Sample: 178 economies

The Age of Turbulence

On a long trip to Kyrgyzstan, I read Alan Greenspan`s autobiography The Age of Turbulence. It made the trip seem longer.

After 11 must-read chapters on his life and career, the former Fed chairman shares his insights into international economic issues, such as Russia`s economic prospects, China`s growth, and globalization, in 14 further chapters. Cliche follows cliche, with some ramblings in-between. There is one constant - central bankers are good people.

I still learned some things. First, if you predict something long enough it is bound to happen. In the case of the equity bubble in the US, Greenspan was 5 years off. Second, having regular breakfasts with smart people makes you smarter. Greenspan had such a routine with Rubin and Summers and says this was his favorite part of the job. And third, if your plane gets canceled it helps to be in high government. A special plane is sent to pick you up.

Here is my Greenspanesque prediction. Georgia will be richer than Russia by 2020. It has been the biggest reformer in Doing Business since 2004, and the economy is growing in double digits.

I may be a few years off...

What Eskom Can Learn

South Africa’s power crisis is in the news these days. With demand levels high compared with the supply capacity, and a reserve margin of 4% well below the internationally recommended minimum of 15%, the state-owned utility Eskom has resorted to adopting a rationing policy: Eskom’s customers have to accept that they currently get 10 to 20% less electricity than before the crisis. Hotels, large offices, and commercial customers will carry the biggest burden.

As the power crisis deepens, the country is looking for lessons to learn from other countries that have been in similar situations. Doing Business is currently developing a new indicator on the importance of electricity for businesses in countries across the world. Once the new indicator is out, countries like South Africa will be able to learn from more than 100 other countries’ practices. In the meantime, lessons have to be drawn from selected cases. Let us have a closer look at the short-term strategies that can be adopted.

Metro and Doing Business Commonalities

Picture this: you are standing on a platform full of people looking up at a screen which usually shows the train schedule. Alas, instead of the train destination and time, it only tells you that a train will be coming – not where to or when. If you happen to live in Washington D.C. and took the red line on the metro this weekend, this pretty much sums up the experience – followed by a 30 to 40 minute wait. Forget planning.

So what does this have to do with regulation or the investment climate? Well, every entrepreneur has to interact with government officials to comply with regulations in operating a company. Doing Business tracks some of these transactions through its indicators on, for example, starting a business, transferring a property title or enforcing a contract through the courts.

What’s the Best Minimum?

It depends. However, when it comes to paid-in capital requirement the best minimum is zero. 75 economies in the Doing Business sample of 178 agree with this statement. Nevertheless, the rest do not and impose minimum paid-in capital requirement of up to 36 times the income per capita of the country. However, at least one of those 75 economies is now considering imposing a minimum paid-in capital requirement – Antigua and Barbuda.

Antigua and Barbuda currently has no minimum capital requirement. That is, the shareholders decide on how much to invest initially in the business, depending on the industry and banking financing requirements. However, the Company Registrar feels this solution is not optimal because it promotes the creation of fake companies and it does not provide enough protection to creditors. Consequently, there is a request from the registrar to raise the paid-in minimum capital requirement to EC$ 100,000 (over USD37,000 and over 3 times Antigua and Barbuda’s income per capita). Will this be a step forward?

Knowing the “Right Person”

Trying to hunt for the “real formula of fees” to connect to electricity can be a challenge in Tajikistan. I realized that during my recent trip for data collection there. Special decrees and fee schedules are not publicly available. Construction specialists warned me of reluctance on the side of state agencies to share information. Phone calls to the State Electric Company (Barki Tojik) to get the real fee schedule and ultimate cost that companies would have to pay for obtaining electricity connection, were in vain. The person on the other end in the State Electric Company was not forthcoming.

I had to do it the only way: find “the right person”.

Aiming for Top 25

In February 2008 in Minsk, the Doing Business team (see picture) met with 45 government officials from 17 different agencies of the Republic of Belarus. Every single one of these representatives expressed their absolute commitment to ease business regulation in the country. Their aim is to be among the top 25 countries in the ease of doing business and top 10 reformers in the World Bank’s Doing Business 2009 report.

One might argue that the goal that Belarus has set seems rather ambitious, not least because this country is currently ranked at number 110.

Tax Haven or Evasion

Good fences make good neighbors. But, in this era of large-scale cross border transactions, no fence, real or virtual, can keep funds from flowing into so-called tax havens. However, matters become much more complex when the tax haven is your neighbor, and you need their unforthcoming cooperation to seal the tax evasion loopholes.

A case in point is the recent tax evasion scandal that has rocked Germany, involving its neighbor, Liechtenstein. It is widely reported that Germany paid an informer about €4m for details in a mammoth tax evasion investigation of funds held by German nationals in a Liechtenstein bank. The information obtained led to arrests of luminaries, with more heads expected to roll in due course.

Institutions and Development: The Second Wave

The last decade has spurred a lively (and well-published) literature on the importance of institutions and regulatory reform for economic growth. Some of the best-known articles include Acemoglu and co-authors' Unbundling Institutions, Djankov and co-authors' The New Comparative Economics, Rodrik's Getting Institutions Right, and Djankov and co-authors' The Regulation of Entry.

These studies have opened the field and put some specifics to the vague term institutions. Kuddos for this achievement. However, they are based on cross-country evidence. This raises a number of concerns, most of all that the associations they show may be due to some unobservable reasons (the favorite one of the detractors of this work is "culture").

Enter Rohini Pande (picture 1) and Christopher Udry (picture 2), with their paper Institutions and Development: A View From Below. Pande and Udry laud the success of the cross-country studies in re-vitalizing the moribund development literature and suggest two ways to enhance its robustness.

The Master of the High Court

The illustrious title does not refer to the most brilliant lawyer in town, nor to a towering court of appeals-judge. The true master of the High Court in Suva, Republic of Fiji Islands, is Jay Udit, a so-called judge in chambers. Yet, his name stirs up universal acclaim for bringing down court delays. Lawyers give kudos, and sometimes a sour face, to his powers in the court room. A Doing Business delegation to the Fijian capital was privileged to see his court in session.

Tuesday morning, 8h15, in a court room packed with attorneys: two court clerks calling the case, lawyers answering with name and “here for plaintiff”, or “here for defendant.” On the bench, Master Udit, speaking up: “This case has been going on since June last year, what is the reason, where is the problem? Clerk, reschedule in ten days, I order costs.” followed by a “But, sir..” – to no avail.

To the next, with displays of bewilderment, “You need more than a month just to get your documents in order?” Then inquiring “If you are pursuing settlement, why do you file in court?” Impatiently, he adds ”What is the question here? What is the nature of the question you cannot resolve?” Finally revealing, angrily, “Trials are scheduled 2 to 3 months in advance, there really is no excuse for missing time.”