Doing Business Blog - The World Bank Group

The Kyrgyz Reform, Big Time

On Thursday the Kyrgyz parliament adopted 4 reforms that will significantly improve the business environment in the country. Changes were introduced to the joint stock companies law, the state registration of legal entities law, the Civil Code, and the town planning and architecture law. See details (in Russian) here.

Prime Minister Chudinov (picture) and Minister of Economy Japarov led the reform effort. The reforms will make it easier to start a business, increase the protection of minority shareholders, simplify the procedures for obtaining construction licenses, and increase credit information.

The reforms happened quickly. In April the government announced a "100-days of reforms" plan, led by Minister Japarov. Inter-ministerial committees were organized on several topics of interest to businesses. Most prominent among these were the four cited above. Ideas on how to reform were debated, and drafts proposed. The proposals were then discussed at an investors forum.

Most important, the media was invited to all discussions and actively covered the debates and progress. This gave the government little room for delays. Hence the new, made-in the Kyrgyz Republic, slogan: What gets committed to in front of TV cameras, gets done.

The Kyrgyz media gets a high mark for its role in making the reforms happen.

Reforming France's Ports

On May 21st, the French Senate passed the government's port reform bill, which foresees the transfer of cargo handling activities at France's ports to the private sector. Initiated by President Sarkozy shortly after his inauguration, the port reform is part of the government's ambitious reform agenda. The objective of the reform, as announced by Prime Minister Fillon last January, is to triple container capacity at French ports by 2015 and create 30,000 new jobs.

In spite of the significant gains expected from the reform, not everyone is happy about it. Since April, France's ports have had to endure a series of 24-hour rolling strikes by port workers unhappy at the prospect of transferring to the private sector. Organized by the National Federation of Ports and Docks, part of the powerful Confédération Générale du Travail, the strikes have increased port congestion causing long delays.

Nigeria Aims For 48-hour Customs Clearance

The Kirikiri Lighter Terminal in Lagos was recently the scene of a curious incident. The chairman of the local chapter of the Association of Nigerian Licensed Customs Agents (ANCLA) came in to discuss a complaint by one of the association's members that a certain customs official had refused to clear his container because he had failed to pay a bribe. Discussions became heated and ended with the chairman being thrown out of the official's office by force. This led to a small riot as association members - fed up with corruption at the terminal - invaded the premises and inflicted considerable damage. See the full story here.

The Nigerian government has set itself the objective of clearing all imports within 48 hours - an ambitious target indeed given that it currently takes 12 days to clear import goods into Nigeria. By creating delays and increasing the costs of trading, corruption makes consumers and entrepreneurs worse off, limits export competitiveness and reduces overall trade volumes.

Business Entry in Bulgaria, Still Slow Going

Last week I visited the business register in Sofia. Since January, it has become an administrative agency, albeit still responsive to the Ministry of Justice. The latter is the reason why the transition hasn't been as smooth as many had hoped.

In an earlier blog, I had opined on the unfortunate decision to keep business registration as part of the judiciary. Now some of the results of this decision have become obvious. First, the registrars were required to have significant legal experience, to match that of judges. Yet, since registration is now an administrative process, their pay scale is that of court clerks (about 450 leva a month, $360) instead of that of judges (1,200 leva). Guess what? Few applicants have come forward to join the new agency.

The Next Singapore?

Georgia's government won a decisive victory at the polls this week - the parliamentary election yielded 120 seats (of 150) for the ruling party.

This is a great success for reform too. Previous Doing Business analyses suggest that in transition economies (those that started from central planning) two terms are needed for reforms to count. Examples include Slovakia's reforms under Ivan Miklos (1998-2006); and Estonia under Mart Laar who served as prime minister in 1992-94 and again in 1999-2002).

Now Georgia has the chance to repeat the success of Estonia and Slovakia. The government should have a higher goal, however: to overtake Singapore as the easiest place to do business in the world.

Kicking In An Open Door

“You never know what to expect,” a Surinamese entrepreneur said to me, describing the unpredictable situation at the port of Paramaribo (see picture). “Before we know it, we’re not allowed to enter the port area because someone woke up that morning and had the idea that we need some additional device, or piece of clothing. Everyone will be sent away off to the store to buy that piece of clothing or equipment. It is never announced in advance, it is so random that no one could see it coming. It is frustrating because we never know what to expect. When requirements change that unexpectedly, we cannot prepare for it and thus, besides the frustration of another, useless change, we lose time in getting our goods from the port, which costs us money. We’re in the port area every day, so why is it that they could not tell us before?”

This is only one example where authorities fail to communicate and the entrepreneur is directly disadvantaged. The information is nowhere to be found until an officer decides to communicate the details at a time that is convenient to him. The rule is implemented immediately without advance notice and the entrepreneur all of a sudden finds himself barred from entering the port area unless he fulfills the unforeseen requirements on the spot.

Top Reformer Votes Today

Georgia, the top reformer in Doing Business 2007, and also the country that has improved the most on the ease of doing business since 2003, is busy voting Wednesday.

The ruling party is expected to win a majority. A second term will cement the big advances in the business environment made during the first mandate.

The theme of the campaign is job creation. The economy has grown at a brisk pace - over 9% in each of the last 4 years. Yet the number of jobs has increased by less: mainly because the large job increases in the private sector were pitted against reducing the size of government and government employment. Also, new technology in some sectors, for example in wineries, allow for a more capital-intensive process.

As the economy continues its growth, the services and agriculture sectors are growing too and more jobs are opening. The banking sector creates the most opportunities for high-paying jobs, and many young graduates go there.

The new prosperity has allowed the government to finance large infrastructure projects, linking regions that were previously hard to do business with. This brings more road construction jobs to poorer regions. Most importantly, it will bring other employment once the roads are opened.

Still, a lot remains to be done and a second term in office will be as busy as the first.

What Would You Do With $400 billion?

As with so many things related to China, the numbers are just staggering. The Chinese government intends to invest $400 billion in trade logistics infrastructure by 2010. A sizeable amount of this will be used to improve port infrastructure in cities such as Dalian, Tianjin and Qingdao.

These infrastructure investments are timely and sensible. With the ongoing growth in Chinese trade - exports increased by more than 21% for the first three months of 2008 - port capacity has to keep pace. The Chinese clearly understand that to pursue a strategy of export-led growth, trade logistics have to be in order. In an integrated global economy, supply chains have to be reliable and fast. It is therefore not surprising that all of the so-called Asian tiger economies - which succeeded through export-led growth - score in the top 30 on the Doing Business Trading Across Borders indicator.

Be Smart, Be On Top

The widely used phrase “getting to the top is hard, staying there is harder” is apparently what authorities in Hong Kong-China had in mind when they conceived the “Be a Smart Regulator Programme” in mid-2007.The program is a large scale improvement plan for granting business licenses across multiple business sectors.

Under this initiative, several procedures to obtain a construction license were either eliminated or expedited. This was achieved not by creating new agencies or structures, but instead by creating working groups with the agencies and bureaus involved in the construction area. These groups found redundant procedures, improved communication and coordination schemes, and identified regulatory “easy fix” changes that could be implemented in order to foster a more efficient construction process in Hong Kong-China.

Going Dutch

About 18 months ago the Doing Business team was asked to study the Dutch regulatory reform program and make some suggestions about its future focus. The resulting report listed several ideas. Most important among those: to conduct surveys of businesses and ask what their main constraints are; to combine the (then) four different units in the Ministries of Finance and Economy into one regulatory reform group; to study the costs of some existing regulations, not just of new regulation; and to communicate the reforms through the views of business people, not the minister or other government officials.

I visited the Dutch Ministry of Finance recently and was shocked to find that all these ideas were implemented. It's so rare!

On second thought, I shouldn't be so surprised. The Dutch are already leaders in regulatory reform in Western Europe. They mean business.

How to Spot a Reformer?

I had a presentation in The Hague on May 14. Someone in the audience asked: how do you recognize committed reformers? I didn't have a good answer.

After working on regulatory reform for the last six plus years, I have met many people interested in reform. And many who were not.

I can list a number of people who instantly struck me as committed reformers: Ivan Miklos (Slovakia), Gerrit Zalm (The Netherlands), Kakha Bendukidze, Zurab Nogaideli and Mikhail Saakashvili (all Georgia), Paul Kagame (Rwanda), Mahmoud Mohieldin (Egypt), the whole government of Macedonia (which is facing elections in 2 weeks), Alvaro Uribe (Colombia), Antoinette Sayeh (Liberia - see picture). And I have met some successful past reformers who were instantly recognizable for their reform zeal: Leszek Balcerowicz (Poland) and Vaclav Klaus (The Czech Republic).

So what makes them reformers? Most importantly: the circumstances. In each case, there is a crisis, of sorts, and someone steps up.

This answer is not very satisfying: why hasn't a committed reformer appeared in, say, Jordan? Or Germany? Or Armenia? Or Burundi?

I don't know the answer, but intend to find out.

Copper, The New Gold

We have been dazzled by gold since the dawn of civilization - partly because it polishes up to a nice shine, partly because it is so rare. Compare that with copper - which has, with much less fanfare, also reached its own record price in the past few weeks, at nearly $4 a pound.

It doesn't sound like a lot, but tell that to the two dozen people that have been killed in America in the past two years while engaged in copper theft - daredevil attempts to strip mobile phone towers and motorway lighting of copper cables. Or the passengers on the hundreds of trains disrupted in Britain every year because of stolen copper cables - described as the most serious threat to their railways apart from terrorism.

Copper crime is not yet the stuff of glamorous heist movies, but it has become widespread worldwide and has become the cause of enormous losses to electric utilities.

Why? The price of copper has quintupled since 1999, reflecting the world's - and in particular China's - need for such a useful metal. Its talent is for conducting things, like heat or electricity, and as a country's living standards improve, its need for copper grows, unlike gold - the demand for yellow baubles goes up only when people feel insecure about the economy or their love life.

Mighty Fuel Tax Holiday

Consumers worldwide have been feeling the heat of rising prices: rising food prices, escalating interest rates, mounting energy costs, and, most notably, sky-rocketing fuel prices. Although it remains a chicken-and-egg question, it is undeniable that when the price of fuel rises, prices of most commodities quickly follow. We are all too familiar with the food riots that have become commonplace, from Cameroon to Haiti, where high food prices partly cost the Prime Minister his job.

Against the background of an economic slowdown (some would call recession), inflation, and a weakening dollar, many Americans have been forced to join the belt-tightening taking place in many other countries. A majority of the electorate this year has highlighted the economy as their top concern. This has naturally presented an opportunity for potential presidential candidates to showcase their creative problem solving skills.

Another World is Possible, If

This week I am debating Susan George, a political scientist and a fierce critic of the World Bank, the IMF and the WTO. George refers to those as the three stooges of global capitalism. Recently she has added the OECD, making the reference passe. An alternative name suggested: the four baddies.

In essence, George's argument is that the Bretton Woods institutions (plus selected others) are the servants of global corporations. And since corporations can't think beyond their noses, nothing good can come out of that. A notable Susan George quote: "Markets can't think about anything beyond about three months. This is very long-term for markets, which is why the important things in life have got to be taken outside of the marketplace. " Lesson one: market institutions are bad for development.

Bhutan's Job Creation Plan

How do you go about persuading young people to take up jobs in the private sector when they all aspire to civil service positions? And how do you go about raising skill levels to fill private sector jobs?

This is the not uncommon dilemma the government of Bhutan has been struggling with for the past few years. Young people want only civil service jobs because of the better working conditions, higher starting salaries and perceived prestige of working in the civil service. Yet the civil service has been increasingly unable to absorb all of those who want a job.

Employers, for their part, prefer to hire foreign workers with more relevant skills. The number of unemployed youth in the cities was getting to the point where Bhutan's most important policy objective of Gross National Happiness was being endangered.

In cooperation with the Asian Development Bank, the government resolved to act, adopting the Labor and Employment Act of Bhutan in January of last year.

Kinks in Reform

A new paper by Daron Acemoglu (see picture) and co-authors finds what I have suspected all along: that policy reform works best in middle-income countries, and/or countries with some level of democracy. Or put differently, in MIT speak, "it is at intermediate values of constraints that policy may be both bad, but also reformable."

Whether or not groups and individuals with political power can thwart reforms depends on the constraints on politicians and on the process of policymaking. In societies such as many in Africa or the Middle East, where there are only few constraints and checks on politicians and on politically powerful groups, policy reform is unlikely to be very effective.

Panama: Modernizing the Judicial System

Panama's economy grew by a historical 11.2% in 2007 (according to the Economist Intelligence Unit). This is mainly due to a boost in the financial and construction sectors, tourism and the commercial expectations placed in the ongoing expansion of the Canal. The institutional framework, nonetheless, still lacks efficiency. It takes 686 days to solve a simple commercial dispute in court in Panama, in line with the backlog observed in the Latin America & Caribbean region. One might think that, with strong economic activity, the number of disputes would increase in Panama, leading to an even longer delay in the judicial system.

But Law 15 of 2008 might easily reverse this assumption. It all started 2 years ago with a devastating fire in the Maritime Courts in Panama City, where thousands of files were destroyed. Since every cloud has a silver lining, a discussion started to install a more efficient and secure judicial system. The result is Law 15, which introduces several important developments.

Paying Taxes: Easy in Bulgaria

Only 9.72% of managers in Bulgaria identify tax rates as a major constraint. Only 13.74% identify tax administration as a constraint. These are the results of the latest World Bank enterprise survey in Bulgaria, done in late 2007.

On these scores Bulgaria is far ahead of the rest of the region. Among East Europeans, nearly 30% still view tax rates as a major constraint. And as recently as 2005, over 20% of Bulgarian managers thought so.

The difference is a series of reforms on reducing tax rates and making it possible to pay taxes online. In this regard Eastern Europe has led the world over the last decade, with Bulgaria as one of the top reformers. In Doing Business 2008, Bulgaria was named the top global reformer in taxes. Businesses seem to agree.

The Friedman Prize goes to...

Yon Goicoechea (see picture), leader of the pro-democracy student movement in Venezuela that prevented President Hugo Chávez from seizing broad powers in a December 2007 referendum, has been awarded the 2008 Milton Friedman Prize for Advancing Liberty.

Mr Goicoechea is a 23-years old law student, a third of the age of the average previous recipient. Peruvian writer Mario Vargas Llosa remarked, "Freedom and complacency are incompatible and this is what we are seeing now in countries like Venezuela where freedom is disappearing little by little, and this has produced a very healthy and idealistic reaction among young people. I think Yon Goicoechea is a symbol of this democratic reaction when freedom is threatened."

When I first heard the news (the actual ceremony is on May 15 in New York), I was puzzled. In an earlier blog, I had predicted that the prize would go to either an East European (Vaclav KLaus or Leszek Balcerowicz) or a New Zealander (Roger Douglas or Ruth Richardson). These candidates fit the previous pattern of recipients. I had also suggested in a later blog that the committee should be more flexible and look at people who have recently made tremendous steps in advancing liberty. The committee went that way, so much so that even I was surprised.