Doing Business Blog - The World Bank Group

Why Foreign Investors Get a Bad Name

I am vacationing in Bulgaria and had a first-hand experience in how foreign investors get a bad name. Half-way through my second day in Aprilzi, a mountainous town in central Bulgaria, the electricity went off. I called the electricity company, to report the problem. "Not a problem," the company representative said, "we disconnected you."

The rest of the conversation is not fit for posting. The gist is that the electricity distribution in this region was recently acquired by CEZ, a Czech company. The company instituted a free replacement of all electricity meters--with one catch. If you don't take up the offer, you get disconnected. You get connected after you paid a fine - but with a 3 day delay!

After some frantic calling and pulling decades-old strings, I was told that if I drove super fast and caught a particular official just about to leave, some small money would do the trick. So I did.

The office of the official, call him the electricity gatekeeper, was full with 8 other just-disconnected people. They all were cursing CEZ and all foreign owners. "This never happened before these expletive expletive came in." I started defending the Czech investors, to no avail. The fellow disconnected simply disregarded me.

And then it struck me: this truly never happened before. The state electricity company never disconnected anyone. It was inefficient, but friendly. The Czechs are very efficient, including at disconnecting.

Most people seem to prefer the former.

Ideas42 Is Born

"Never again," cried the man, "never again will we wake up in the morning and think: Who am I? What is my purpose in life? Does it really, cosmically speaking, matter if I don't get up and go to work? For today we will finally learn once and for all the plain and simple answer to all these nagging little problems of Life, the Universe and Everything!"

"Tell us!"

"Alright," said Deep Thought. "The Answer to the Great Question..."

"Yes...!"

"Of Life, the Universe and Everything..." said Deep Thought.

"Yes...!"

"Is." said Deep Thought, and paused.

"Yes...!"

"Is."

"Yes...!!!...?"

"Forty-two," said Deep Thought, with infinite majesty and calm.

"Forty two?!" yelled Loonquawl. "Is that all you've got to show for seven and a half million years' work?"

"I checked it very thoroughly," said the computer, "and that quite definitely is the answer. I think the problem, to be quite honest with you, is that you've never actually known what the question is."

This is the origin of 42, from The Hitchhiker's Guide to the Galaxy, a novel by Douglas Adams. Deep Thought is the most brilliant computer, tasked with finding what the meaning of life is; Loonquawl is a mouse who presides over the Day of the Answer.

Inspired by the idea of asking the right questions, Harvard University and the IFC today established Ideas42, a new think-tank on development issues. It is housed at the institute for quantitative social studies at Harvard.

More to come on what Ideas42 will be doing...

Mighty Books

In the June issue of Forbes, its founder - Steve Forbes - praises Doing Business:

"The World Bank's reputation has plummeted in recent years because of alleged cover-ups of extensive corruption and growing doubts about how effective its projects have been in helping countries develop economically. But one of its undertakings is having an enormously positive influence on the global economy--and its cost is a nanofraction of the routine infrastructure undertakings that can end up costing billions of dollars.

Each year the World Bank issues a book entitled Doing Business. It surveys 178 economies--from Afghanistan to Zimbabwe--in regard to their regulations that affect how businesses are started and conducted. Countries are judged in ten categories that span the life of an enterprise, from its launching, to coping with licenses, obtaining credit, paying taxes, enforcing contracts and dealing with bankruptcy or dissolution of the entity.

This book is no mere academic exercise. Governments read it. The other day I ran into an important U.S. official who pointed out that there's now something of a competition in a number of developing countries to see which one can improve most in the Doing Business annual survey."

This made me think: what other books have stirred excitement in development? Here is a first list - readers, please add suggestions.

1. Hernando de Soto's The Other Path ushered in an understanding of the cost of burdensome regulation, namely the exclusion of many people from the formal sector.

2. Amartya Sen's Development as Freedom. As countries go richer, they also become more democratic. Or the other way round?

3. William Easterly's The Elusive Quest for Growth brought to the fore the discussion on development effectiveness.

4. Paul Collier's The Bottom Billion highlights civil wars, corruption and bad regulations in Africa.

5. Andrei Shleifer and Dan Treisman's A Normal Country focus on Russia in transition. We should have studied this transition more closely.

Doing Business and the Commodity Boom

Open a newspaper these days and chances are you'll read about the price of one commodity or other just having set a new record. Most analysts will point to growing demand from large emerging markets such as China and India. An aspect less commented on in this commodity crunch is the supply side of the equation.

Trade efficiency may matter, as large commodity exporter rankings on the Doing Business Trading Across Borders indicator suggest. Kazakhstan, a commodity superpower, comes in at 178 out of 178; the Democratic Republic of the Congo lingers at 154; and Brazil, a mining giant, is at 93. Even Australia, a top 10 country in the overall ease of doing business, only manages 34th place when it comes to trade.

Bureaucracy and inadequate transportation infrastructure mean supply may not always be as responsive to increases in demand as it could be. Poor roads, delays at borders and port congestion all constitute serious obstacles to export growth. Add to that the power shortages in countries such as South Africa (see a recent blog post) - through which a sizable part of commodity exports from southern Africa passes - and you could argue we are also going through something of a supply crunch.

Helpful Governments

Do businesses perceive their government to be "very helpful, mildly helpful, neutral, mildly unhelpful or very unhelpful?" This question is asked in the World Bank enterprise surveys.

A recent paper by Mohammad Amin uses these data to find that "most regulatory measures lower a firm’s perception of how helpful the government is. Hence, it is unlikely that heavier regulation is an efficient or desirable response from the firms’ point of view to disorder."

It is not all that surprising that businesses consider the government to be a drag on their activity, a skeptic may say. After all, the governments make businesses pay taxes and go through all kinds of administrative hoops.

True, but this is the case for businesses in every country. Yet Amin's study sees different levels of satisfaction with the government across countries. So the analysis captures a relationship between the level of regulation and the satisfaction of businesses; not just that businesses are prone to complaining.

Romania: E-Procurement Remedy

Public procurement plays a major role in most economies. In OECD countries, public procurement accounts for 15% of GDP and in the new EU member states like Romania the number is approximately 16%.

Contracts for public works can comprise large, long-term infrastructure contracts, such as building utilities and roads, but also smaller, shorter contracts like supplying public institutions with goods and materials. Given the extent and complexity of public procurement, this activity is particularly vulnerable to abuses.

Special tools such as e-procurement can increase transparency, efficiency and lower costs of government activities, assuming that the necessary legal framework and technology infrastructure are implemented. Taking into account the importance of public procurement, Doing Business is currently developing a new set of indicators to reflect procurement practices in the electricity sector around the world.

G8 Urges Doing Business Reforms, Promotes FIAS

The G8 met finance ministers over the weekend to outline an action plan for growth in Africa. The resulting document is remarkable for its focus on making it easier for African businesses to operate. The text of the G8 communique is here.

The G8 ministers made reforms of the business environment a priority: "8. National regulatory frameworks should be strengthened to attract and retain private capital. Complicated regulatory barriers reduce incentives for African entrepreneurs to enter the formal economy. While a few African countries are making progress in simplifying business regulations, much is still to be done in most others. To this end, we encourage countries to use surveys, such as the World Bank's "Doing Business Reports", as indicators of possible barriers to business and of reform efforts."

The action plan goes on to say: "We renew our commitment to the existing technical assistance facilities focusing on the promotion of anti-corruption enforcement, and the reform of regulations, taxation and customs, such as the IFC (International Finance Corporation)'s PEP (Private Enterprise Partnership) Africa, the World Bank's FIAS (Foreign Investment Advisory Services) and the multi-donor ICF (Investment Climate Facility)."

Most encouraging in the G8 statement is the recognition that widespread informality - in business and in property rights - is the main drag on growth in Africa. "Expanding access to the formal economy" appears three times in the communique. Such access is achieved when barriers to entry are reduced, when it is easier to get credit, trade across borders, pay taxes, and get licenses.

Why are such reforms important? “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 The Other Path. It is estimated that 80% of workers in Africa are in the informal sector.

We have our work cut out.

Cities of Global Commerce

MasterCard has just published its second annual ranking of the top-75 cities of global commerce. Sofia (Bulgaria) - my home town - is not among them.

London beats out New York for the top spot, followed by Tokyo, Singapore and Chicago. Bangkok, at #42, is the top-tanked city from an emerging economy. Bogota (Colombia), Ryadh (Saudi Arabia), and Cairo (Egypt) entered the list for a first time. That Beirut makes it, at #74, may raise some eyebrows. The United States has the most entrants, 12, followed by China, with 5.

The ranking scores seven areas: legal and political framework, economic stability, ease of doing business, financial flows, business center, knowledge creation, and livability. These carry different weights, with financial flows judged most important (22% weight), followed by ease of doing business (20%); while livability and economic stability have a weight of 10% each. Excitingly, the Doing Business indicators are heavily relied upon. They constitute 60% of the legal and political framework index; and 70% of the ease of doing business index. In other words, a fifth of the overall rank is based on the Doing Business project.

This may explain why Sofia hasn't made it yet.

Maternity Leave: the Longer the Better?

I recently came across an interesting factoid : apparently, the former Soviet Union countries have the longest total maternity and child care leave in the world.

During my travel to Azerbaijan, Georgia and Russia, I discovered that in both Azerbaijan and Georgia, the duration of paid maternity leave is 126 days; in Russia, it totals 140 days, 70 days being before birth and 70 after. In all three countries, women can take an additional partially paid leave and keep their employment: 477 days in Georgia, and up to three years in Azerbaijan and Russia.

On the other extreme, the U.S. Family and Medical Leave Act provides for 12 weeks of unpaid job-protected leave, and it only covers those who work for larger companies. The Act does not provide for paid maternity leave, but this may be legislated for at the state level. California, for example, allows leave for both parents with partial pay.

What are the issues behind maternity leave regulations?

For Whom the Bell Tolls

Last week I partied on the floor of the New York Stock Exchange. Yes, really.

The occasion was the second annual Reformers' Club: an event organized by the Doing Business team to celebrate the most successful reformers of the past year. This year's recipients were: H.E. Dr. Mahmoud Mohieldin, Minister of Investment, Egypt; H.E. Ivan Šuker, Minister of Finance, Croatia; H.E. Nikola Gruevski, Prime Minister, FYR Macedonia; H.E. Ekaterina A. Sharashidze, Minister of Economic Development, Georgia; H.E. Luis Guillermo Plata, Minister of Commerce, Industry and Tourism, Colombia; H.E. Dr. Awwad S. Al-Awwad, Deputy Governor, Saudi Arabian General Investment Authority; and H.E. Plamen Oresharski, Minister of Finance, Bulgaria.

There was an additional reason to celebrate. Mr Gruevski's party had just won parliamentary elections in FYR Macedonia, with a mandate of further reforms. Two weeks earlier, so had the party of Minister Sharashidze. Again, the main platform was further reforms to create more jobs and pull more Georgians out of poverty.