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 Comprehensive reform saw the light of day when the final set of 2006 regulations demolished the old law’s outdated criminal liability provisions.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...