Doing Business Blog - The World Bank Group

Regulating Labor in Developing Countries

My latest paper (The_Regulation_of_Labor_in_Developing_Countries.pdf) summarizes the research on the effect of labor regulation in developing countries, using papers published since 2004. The survey also presents cross-country correlation analyses. Both exercises show that developing countries with rigid labor regulation tend to have larger informal sectors and higher unemployment, especially among young workers.

In terms of new research, developing countries present an exciting venue for studying the impact of labor regulatory reforms. A number of countries, especially in Eastern Europe, have recently undergone significant reforms to make labor regulation more flexible. At the other end, several countries in Latin America have made labor regulation more rigid. These reforms are larger in magnitude than any reforms in developed countries and their study can produce new insights on the benefits of labor regulation.

Want to Fly Safely? Improve Creditor Rights

I am reading up on the academic papers that use the Doing Business data. So far the most entertaining paper is called Vintage Capital and Creditor Protection by Effi Benmelech and Nittai Bergman, both at Harvard. Their argument? In the absence of good creditor protections banks do not give out loans for large equipment - like new airplanes. Airlines in such countries are forced to use second-hand equipment or to lease equipment. Both make it less likely to further invest in safety and communication improvements: the planes are old or someone else's, after all. The result is less safety in flying.

Next time you are booking a flight, you may want to consult the latest Doing Business report on the country's creditor rights score.

Regulation and Trust: Substitutes?

A new paper by Philippe Aghion (see picture) and co-authors makes the point that "in a cross-section of countries, government regulation is strongly negatively correlated with social capital (trust). We document, and try to explain, this highly significant empirical correlation. The correlation works for a range of measures of social capital, from trust in others to trust in corporations and political institutions, as well as for a range of measures of regulation, from product markets, to labor markets, to judicial procedures."

So what?

The main point is that culture (as measured by distrust) and institutions (as measured by regulation) co-evolve. Culture shapes institutions, and institutions shape culture. The causality runs in both directions. Unfortunately, it is very difficult to test this prediction of the model using instrumental variables, since many exogenous factors that influence trust might also directly influence regulation, and vice versa. For example, one can think of using legal origins as instruments for regulation (see, e.g., Djankov et al. 2002), but to the extent that colonizing Europeans who transplanted legal traditions also transplanted aspects of culture, the instrument would not be valid.

New Doing Business Report on South East Europe

The Doing Business team has just come out with a new subnational report, this time on South East Europe. It is a timely contribution - South East Europe is becoming increasingly integrated into the European economy, and business reform will undoubtedly help improve regional competitiveness. The subnational report provides detailed data on business regulation in 22 cities in the economies of Albania, Bosnia and Herzegovina, Croatia, Kosovo, FYR Macedonia, Montenegro, and Serbia. You can download copies of the report and the press release in seven languages at the bottom of this post. 

One of the big findings from the report is that the cities of South East Europe don't have to look far for models of reform - there  are already a number in the region. Bitola (FYR Macedonia) came out on top as the easiest city to do business. Business start-up in Bitola is both fast and cheap. Starting a business requires only 8 procedures and 10 days at a cost of 3.9 percent of income per capita. Shkodra (Albania) is another good example with six procedures, seven days, and a cost of 25.7 percent of income per capita to start a business. A hypothetical city combining all the best regional practices would rank among the top ten locations in the world on the ease of doing business – there is a big potential for sharing practices across the region.

As for the motivations behind reform, I leave you with a short tale from the authors of the report:

Zlatko has a dream. He wants to start a Web design company in his hometown of Bitola (Macedonia, FYR) after completing his computer science degree in Belgium...In only 10 days, his company will be operational and his first project can be well under way. He is fortunate. If he tried to register his business in Mostar (Bosnia and Herzegovina), he would have to wait for 61 days before he could welcome his first clients. He knows that even if he could wait that long, his clients could not.

Here are copies of the press release in a number of languages: 

Download doing_business_press_release_SEE_albania.doc

Download doing_business_press_release_SEE_bih.doc

Download doing_business_press_release_SEE_croatia_eng_version.doc

Download doing_business_press_release_SEE_croatia.doc

Download doing_business_press_release_SEE_english.doc

Download doing_business_press_release_SEE_fyr_macedonia.doc

Download doing_business_press_release_SEE_kosovo_albanian.doc

Download doing_business_press_release_SEE_kosovo_serbian.doc

Download doing_business_press_release_SEE_montenegro.doc

Download doing_business_press_release_SEE_serbia.doc

Here are copies of the Doing Business South East Europe report in various languages:

Download DB08_Subnational_Report_SEE_Albanian.pdf

Download DB08_Subnational_Report_SEE_Bosnian.pdf

Download DB08_Subnational_Report_SEE_Croatian.pdf

Download DB08_Subnational_Report_SEE_English.pdf

Download DB08_Subnational_Report_SEE_Macedonian.pdf

Download DB08_Subnational_Report_SEE_Montenegrin.pdf

Download DB08_Subnational_Report_SEE_Serbian.pdf

And here is a brief disclaimer for the most populous cities covered:

Download disclaimer_for_most_populous_cities.doc

Entry Barriers and Growth

A new paper by Antonio Ciccone (picture) and Elias Papaioannou looks at the link between entry regulation and growth. Or, more precisely, between entry regulation and the intersectoral reallocation of resources in the presence of economic shocks. Here is how the authors describe it:

"We study how restrictions on firm entry affect intersectoral factor reallocation when open economies experience global economic shocks. In our theoretical framework, countries trade freely in a range of differentiated sectors that are subject to country-specific and global shocks. Entry restrictions are modeled as an upper bound on the introduction of new differentiated goods following shocks. Prices and quantities adjust to clear international goods markets, and wages adjust to clear national labor markets. We show that in general equilibrium, countries with tighter entry restrictions see less factor reallocation compared to the frictionless benchmark. In our empirical work, we compare sectoral employment reallocation across countries in the 1980s and 1990s with proxies for frictionless benchmark reallocation. Our results indicate that the gap between actual and frictionless reallocation is greater in countries where it takes longer to start a firm."

A worthy read. You may also want to read this related paper.

The Top-100 Businesses in Bulgaria

The other day the business weekly Capital published the list of 100 largest businesses in Bulgaria.

One memorable note: not a single "new economy" firm. The list is dominated by energy (46.1 percent of revenues), metals (15.7 percent), trade (8.7 percent) and telecoms (7.4 percent). With all the software engineers produced in the country, no software firm makes the list.

Another interesting note: 55 of the top-100 operate in Sofia (the capital city).

A third point: over half of the businesses have foreign owners.

A final point: about 40 percent of the top-100 are businesses that started since 1995.

The study of business evolution and industrial structure in developing countries is so nascent, that top-100 lists can add a lot to our understanding of economic growth.

Real Sign of Success

Georgia has been a top reformer in the last four doing business reports, ever since the Saakhashvili government took office.

Since then, annual growth hovers around ten percent each year, and investment has increased six-fold. Georgia now has more business per adult population than all countries but New Zealand and Singapore.

But the real signs of success are these: in 2007 the number of births increased 3.1 percent relative to 2006; and the number of deaths fell by 2.5 percent. This resulted in a population growth of 8,109 people: higher than any year since 1992. One of the reasons is this: average household income went up by 9.5 percent, while average household expenditure grew by 7.3 percent.

In other words, the standard of living is going up, and with this families decide to have more children. (Interestingly, Bulgaria - another top-10 reformer last year - also registered its first positive population growth since 1985).

The conclusion: if you want your population to grow, reform.